Dollar Mixed as Risk-off Impulses Grow

January 21, 2022
  • We have yet to pinpoint a single factor behind the risk-off vibe; the march higher in U.S. yields has been interrupted by growing risk-off impulses; regional Fed manufacturing surveys for January continue rolling out; weekly jobless claims were disappointing; Canada reports November retail sales; Chile President-elect Gabriel Boric will unveil his cabinet
  • U.K. reported weak November retail sales; BOE tightening expectations remain elevated; Brexit is likely to heat up again
  • Japan reported national CPI for December; PBOC continued easing with cuts to several other policy rates; Korea reported firm trade data for the first 20 days of January

The dollar is mixed despite growing risk-off impulses. DXY is hanging on to its recent gains, trading flat near 95.70 after returning to its familiar 95-97 trading range that has largely held since mid-November. EUR is up modestly after testing support near $1.13, while sterling is underperforming after weak retail sales data and has broken below support near $1.36 to trade near $1.3550. USD/JPY trading back below 114, while EUR/CHF is nearing the December low near 1.0326. If risk-off impulses persist, we would expect the dollar to gain more traction.


We have yet to pinpoint a single factor behind the risk-off vibe. Some say its fears of a Fed policy mistake. Others point at mixed earnings or even tensions between Russia and Ukraine. Weak data suggesting greater than anticipated omicron impact haven’t helped. Whatever the proximate causes, we do not think the underlying narrative has shifted that much. That is, the U.S. economy will continue to outperform, the Fed will continue to remove accommodation, and inflation will eventually ease. The U.S. 3-month to 10-year yield curve has flattened to 162 bp from the 175 peak on Tuesday but remains far from inversion that would signal imminent recession.

The march higher in U.S. yields has been interrupted by growing risk-off impulses. The 2-year yield is trading near 1.02% vs. the 1.07% peak Wednesday, while the 10-year yield is trading near 1.79% vs. the 1.90% peak Wednesday. Stocks are in the red with MSCI World down for the fourth straight day. Equity market weakness has been concentrated in tech, with Nasdaq down -7% over the past five days vs. -5% for S&P 500 and -4% in DJIA. Futures are pointing to a -1% open for Nasdaq. In the currency markets, USD/JPY and EUR/CHF are down and trading near recent cycle lows. Of note, XBT is down over -6% today to trade at the lowest level since last August below $39k, further eroding the notion that it can serve as some sort of safe haven.

Regional Fed manufacturing surveys for January continue rolling out. Philly Fed yesterday came in at 23.2 vs. 19.0 expected and 15.4 in December. Employment fell to 26.1 from 33.9, while prices paid rose to 72.5 from 66.1. This reading was very much at odds with the weakness shown in the Empire survey earlier this week. Richmond and Kansas City Fed report next week but we suspect we will have to wait until February or March to get a truly clean read of the economy.

Elsewhere, weekly jobless claims were disappointing. Initial claims rose to 286k vs. 225k expected. This can also be chalked up to omicron. Initial claims were for the BLS survey week and suggests some further weakness in NFP. Current Bloomberg consensus sees 290k vs. 199k in December. However, as we’ve noted before, the U.S. is very close to full employment and so it wouldn’t take more than a couple of decent jobs reports to get unemployment down to pre-pandemic levels. This is why the Fed is so keen to tighten policy sooner rather than later. December leading index (0.8% m/m expected) is the only U.S. data report today.

Canada reports November retail sales. Headline is expected at 1.2% m/m vs. 1.6% in October, while sales ex-autos are expected at 1.2% m/m vs. 1.3% in October. Data have come in firm and so BOC tightening expectations remain heightened. Current BOC forward guidance suggests liftoff in Q2 but WIRP suggests nearly 75% odds of liftoff at the next policy meeting January 26. The market sees 150 bp of tightening this year that would take the policy rate to 1.75%, with 50 bp more is priced in for 2023.

Chile President-elect Gabriel Boric will unveil his cabinet. All eyes are on his choice for Finance Minister. Several names have been mentioned, including current central bank President Mario Marcel. He has headed up the central bank since 2016 and has been a board member since 2015. Before that, he was the government’s budget director and has also worked at the World Bank. CLP has been on fire lately but today’s cabinet choices could be a make or break moment here. Of note, CLP is the best EM performer YTD at 6.5%.


U.K. reported weak November retail sales. Headline sales were expected at -0.6% m/m vs. 1.4% in November, but instead plunged -3.7%. Sales ex-auto fuel were expected at -0.8% m/m vs. 1.1% in November but instead fell -3.6%. Last week’s data dump for November came in stronger than expected, but its clear that the December sales data suffered from the spread of omicron. In addition, GfK consumer confidence dropped 4 points to -19. This was already seen in the U.S. retail sales data and markets have to brace for similar readings from Europe and Japan. The good news is that this variant peaks rather quickly and so the negative impact may only be for a month or two. Will this data spook the BOE into pausing next month? Possible but doubtful.

Bank of England tightening expectations remain elevated. WIRP suggests nearly 90% odds of another hike February 3, and we would be surprised if the BOE confounded markets again. After that, the market sees hikes at very other meeting that would take the policy rate to 1.25% by year-end. Furthermore, the market sees about 20% odds of a fifth hike this year to 1.50%. We still think this pricing overstates the BOE’s need to tighten, as headwinds abound from Brexit, higher energy costs, and fiscal tightening. Along the way, Quantitative Tightening will also kick in as the policy rate moves higher.

Brexit is likely to heat up again. Reports suggest its top Brexit negotiator Sefcovic has told EU officials that the window of opportunity to strike a new deal with the U.K. will close late next February. He warned that he has yet to see a fundamental change in the U.K. stance despite a positive shift in tone in talks this month. Sefcovic said that ongoing talks will aim to reach an agreement by the end of February, ahead of campaigning for Northern Ireland Assembly elections in May. Sefcovic and U.K. Foreign Secretary Truss agreed earlier this month to intensify negotiations over the so-called Northern Ireland Protocol, but it sounds like little progress has been made so far. Truss will visit Brussels for more talks on Monday. Posturing and brinksmanship from both sides leading up to this potential deadline will surely weigh on both GBP and EUR, with the former likely to underperform the latter.


Japan reported national CPI for December. Headline inflation came in at 0.8% y/y vs. 0.9% expected and 0.6% in November, while targeted core (ex-fresh food) inflation came in at 0.5% y/y vs. 0.6% expected and 0.5% in November. Core inflation remains stuck at the highest since February 2020 but still well below the 2% target. Clearly, Governor Kuroda was right to push back this week against any perceived BOJ hawkishness. Simply put, the BOJ is nowhere near removing accommodation.

PBOC continued easing with cuts to several other policy rates. Following Monday’s 10 bp cut in its key 1-year Medium-term Lending Facility rate, the bank today cut the rates on its overnight, 1-week, and 1-month standing lending facilities (SLF) by the same amount. As the name suggests, the SLF is for shorter tenors and can only be accessed by the major banks. It is also considered to be the upper bound for market rates when the PBOC manages liquidity in the system. These rates move in tandem with the MLF and so these are just catch-up moves. That said, further rates cuts are widely expected over the course of 2022. Reports suggest PBOC has directed large state-owned banks and regional banks to extend more credit to companies and households. Sources added that bank lending in the first two weeks of the year was lower than the same period in 2021.

Korea reported firm trade data for the first 20 days of January. Exports rose 22.0% y/y in the first 20 days of the month, while imports rose 38.4% y/y. Accounting for calendar effects, average daily exports rose 18% y/y. By comparison, exports for the month of December rose 18.3% y/y. Looking at the country breakdown, exports to China rose 18.8% y/y, exports to the U.S. rose 28.0% y/y, and exports to the EU rose 15.8% y/y. Yesterday, Taiwan reported stronger than expected December export orders growth of 12.1% y/y. Still, this was the slowest since October 2020 and warns of potential weakness in export shipments coming around mid-year.

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