Dollar Firm in Subdued Holiday Trading

April 15, 2022
  • U.S. rates have resumed their move higher; Fed officials remain hawkish; the Fed’s pivot to limiting demand is noteworthy; retail sales data are worth discussing; despite the holiday, some U.S. data will be reported
  • ECB delivered a dovish surprise; Lagarde maintained a dovish tone in her press conference; in terms of policy, Lagarde stuck with the cautious timeline already in place; as usual, some hawkish leaks from "unnamed ECB officials" came later in the day
  • BOJ will likely make significant changes to its FY22 inflation and growth forecasts; this suggests the BOJ will maintain its ultra-dovish stance this month; PBOC unexpected kept its 1-year MLF rate unchanged at 2.85%

The dollar remains firm as U.S. rates continue to adjust. DXY is up for the second straight day and is trading near 100.463 after making a new cycle high yesterday near 100.761. With the clean break of the psychological 100 level, the March 2020 high near 103 is the next big target. The euro remains heavy near $1.08 after it made a new cycle low near $1.0760 yesterday due to the dovish ECB decision (see below). Despite the modest recovery, we look for a test of the March 2020 low near $1.0635. The relentless rise in USD/JPY continues as it is up for the eleventh straight day and traded at a new cycle high near 126.70. There are no significant chart points until the 2002 high near 135.15. With the BOJ so far unwilling to change its ultra-dovish stance (see below), the yen is likely to continue weakening despite rising official concerns. Sterling remains heavy near $1.3070 after its bounce from the new low for this move near $1.2975 ran out of steam near $1.3150. We still look for a test of the November 2020 low near $1.2855 and then possibly the September 2020 low near $1.2675. Between the likely return of risk-off impulses and the hawkish Fed outlook, we believe the dollar uptrend remains intact.


U.S. rates have resumed their move higher. US 10-year yield rose 13 bp to 2.83% yesterday, matching the high from earlier this week. The 2-year is lagging a bit but still rose 11 bp to 2.45% yesterday, not yet close to matching the 2.60% cycle high from last week. That said, the price action in the rates markets yesterday supports the notion that the preceding 2-day bond rally was really all about short-covering and positioning. As a result, U.S. yields and USD should continue to move higher. With inflation expectations remaining fairly steady, the real 10-year yield has risen to -0.08%, the highest since March 2020 and poised to move into positive territory for the first time since the pandemic began. U.S. bond and equity markets are closed today due to Good Friday.

Fed officials remain hawkish. Yesterday, Williams said he was open to 50 bp increments for tightening and noted “I think that’s a reasonable option for us because the federal funds rate is very low. We do need to move policy back to more neutral levels.” Elsewhere, Harker said “I expect a series of deliberate, methodical hikes as the year continues and the data evolve. I also anticipate that we will begin to reduce our holdings of Treasury securities, agency debt, and mortgage-backed securities soon. While the Fed cannot do much to ameliorate the supply issues that are increasing inflation, we can begin to affect demand.” Lastly, Mester said “Our intent is to reduce accommodation at the pace necessary to bring demand into better balance with constrained supply in order to get inflation under control while sustaining the expansion in economic activity and healthy labor markets.”

The pivot to limiting demand is noteworthy. The Fed is acknowledging that the current bout of inflation is more than just a supply side issue. Can the Fed engineer a soft landing? That is the million dollar question but for not, markets seem to have confidence that the Fed can be successful. To us, the main indicator to follow with regards to recession risk remains the U.S. yield curve. As our faithful readers know, the recent inversion in portions of the curve was a potential warning sign. However, the key 3-month to 10-year curve was never near inverting and at 208 bp, it is the steepest since December 2016. Of note, the recent rise in 10-year yields has led to a positive curve across all tenors now.

Retail sales data are worth discussing. The March readings were on the whole slightly weaker than expected, but revisions to the January and February data resulted in a stronger than expected report overall. For now, consumption is holding up despite the hit to household spending power due to high inflation. The Atlanta Fed’s GDPNow model is tracking 1.1% SAAR growth for Q1 after the retail sales data and compares to 6.9% SAAR actual in Q4. Q1 GDP data will be reported April 28 and Bloomberg consensus is currently 1.0% SAAR but rising to 3.0% SAAR in Q2. Of note, University of Michigan consumer sentiment came in higher than expected for April and driven by an improvement in the expectations component. This suggests April retail sales should hold up.

Despite the holiday, some U.S. data will be reported. We get our first glimpse of April data as the Fed manufacturing surveys start rolling out. Empire survey will be reported and is expected at 1.0 vs. -11.8 in March. March IP will also be reported and is expected at 0.4% m/m vs. 0.5% in February. The manufacturing sector has held up well despite ongoing supply chain issues. February TIC data will also be reported.


European Central Bank delivered a dovish surprise. All policy settings were kept steady and the bank stuck to its cautious timeline for removing accommodation. As previously set out, APP will slow to EUR20 bln per month by June and will likely end in Q3, though the Q3 pace will be data-dependent. Rates will still rise “some time” after APP ends. We think many (including us) were looking for a possible end to APP in June but that's not the case, it seems. If it ends in Q3 as the ECB intends, then liftoff seems unlikely until Q4.

Madame Lagarde maintained a dovish tone in her press conference. She acknowledged that Q1 growth was weak due to pandemic restrictions and that the war was weighing on businesses and consumers currently. Lagarde identified energy is still the main reason behind high inflation but added that price rises have become more widespread. While labor demand remains robust, she sees muted wage growth overall. She said upside risks to inflation and downside risks to growth have both increased. Of note, Lagarde said that the ECB is always attentive to FX moves but did not discuss it today.

In terms of policy, Lagarde stuck with the cautious timeline already in place. she acknowledged that APP will “very likely” conclude inn Q3 but the bank still hasn’t decided when. Lagarde stressed that the ECB will stick to its preferred sequence whereby it completes APP first, with the first hike some time thereafter. She noted that “some time” after can mean a week or several months. Lagarde said it is premature to talk about Quantitative Tightening, as the eurozone economy is in a different place than the U.S. is. Looking ahead, Lagarde said the ECB will decide on the end of APP and the rate path forward at the June 9 meeting. However, she cautioned that the June decision will include an “element of judgment” as the ECB can’t base its policy decisions only on its economic projections.

Here are the key takeaways from the dovish ECB narrative: 1) APP is likely to end in Q3 followed by likely liftoff in Q4; 2) the June 9 meeting will provide key forward guidance on the end of APP and potential liftoff but for now, the ECB appears to be in no hurry to hike rates; 3) the weak euro does not seem to be a concern; 4) inflation is still seen as an energy issue, with wage growth remaining muted; and 5) there will be no firm commitment yet on how soon rates will be hiked after APP ends.

As usual, some hawkish leaks from "unnamed ECB officials" came later in the day. We've seen this movie before, where hawks are unhappy with Lagarde's dovish stance and so try to undermine her message. To wit, reports suggest that the ECB is seeing growing consensus for a 25 bp hike in Q3 and that several policymakers called for an earlier end to APP. Lagarde went out of her way not to get pinned down on the timing for liftoff and then was undermined by these unnamed officials. This is borderline mutiny and quite frankly, this is a terribly inconsistent way to run central bank messaging. Unfortunately, that's what will happen when there are 25 (yes, 25) policymakers on the Governing Council; someone will always have an axe to grind. Still, the sources said that the ECB decision was unanimous.

ECB tightening expectations eased a bit after the ECB meeting. WIRP suggests odds of liftoff June 9 are only around 30% now vs. nearly 60% at the start of the week, but liftoff July 21 remains fully priced in. Swaps market is still pricing in 125 bp of tightening over the next 12 months, with another 75 bp of tightening priced in over the following 12 months. This still seems way too aggressive to us, especially in light of Lagarde’s dovish stance that is most likely driven by recent weakness in the real sector data.


Reports suggest the Bank of Japan will likely make significant changes to its FY22 inflation and growth forecasts due to high oil and commodity prices. More specifically, the bank will probably raise its FY22 projection for core inflation to 1.5-1.9% vs. 1.1% seen in January. The BOJ will also probably cut its FY22 growth forecast from 3.8% seen in January. However, sources say that the BOJ will make clear that the updated forecasts are not meant to signal that inflation is approaching its 2% inflation target as the price gains that aren’t viewed as sustainable. This suggests that the FY23 forecasts are unlikely to be changed significantly. Lastly, officials stressed that there is no need to tighten policy in the same way as the Fed and other central banks have as the bank must continue to support the economy by keeping stimulus in place.

This suggests the BOJ will maintain its ultra-dovish stance this month. As these forecasts will be part of the Outlook Report for the upcoming April 27-28 meeting, the tone of these remarks suggest the bank will reaffirm its current policy stance. After this meeting, the next Outlook Report comes with the July 20-21 meeting. We say this because we think it unlikely that the BOJ will make any changes in its policy stance at a meeting that does not provide support for the decision with updated forecasts.

PBOC unexpectedly kept its 1-year MLF rate unchanged at 2.85%. Consensus saw a 10 bp cut. The PBOC also refrained from injecting extra liquidity into the financial system by simply rolling over the CNY150 bln of MLF loans maturing. Consensus saw a net injection of CNY100 bln. With the economy slowing sharply due to lockdowns, policymakers have made it clear that more stimulus is coming. Elsewhere, policymakers urged commercial banks to lower their deposit rates by 10 bp across all tenors. It also appears that the PBOC may be readying a cut in reserve requirements. Continued easing by the PBOC should lead interest rate differentials to continue moving in the dollar’s favor vs. the yuan.

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