Dollar Firm as U.S. Rates Continue to Adjust

April 08, 2022
  • Fed officials remain hawkish; U.S. yields continue moving in the dollar’s favor; Canada reports March jobs data; BOC tightening expectations are running hot; Chile reports March CPI; Brazil reports March IPCA inflation
  • The account of the March ECB meeting tiled hawkish; ECB tightening expectations remain heightened; Russia delivered a surprise 300 bp rate cut to 17.0%.
  • Japan February current account data are worth discussing; India delivered a hawkish hold

The dollar remains firm as U.S. rates continue to adjust. DXY is up for the seventh straight day and made a new cycle high near 100. After the psychological 100 level, the March 2020 high near 103 is our next big target. The euro remains heavy and traded at a new low for this move today near $1.0850 before bouncing back to near $1.09. A test of the March 7 low near $1.0805 is still in the cards. The relentless rise in USD/JPY continues as it is up for the sixth straight day and trading just above 124. We look for a test soon of last week’s high near 125.10. Sterling remains heavy and traded at a new low for this move today near $1.3025. It should break below last month’s cycle low near $1.30, which would set up 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 even more hawkish Fed outlook for tightening, we believe the dollar uptrend remains intact.


Fed officials remain hawkish. Yesterday, Bullard said that the current Fed policy rate was too low by about 300 bp. However, he stressed that the Fed is not as far behind the curve as some models show. He said the yield curve inversion signal should be taken seriously, but added that the Ukraine crisis was one of several factors depressing 10-year yields. Bullard’s comments implies terminal Fed Funds rate of 3.35-3.5%, which coincidentally is our best guess right now. There are no scheduled Fed speakers today but wholesale trade sales and inventories will be reported.

U.S. yields have resumed moving in the dollar’s favor. The 2-year yield is trading at 2.51%, slightly below the new cycle high near 2.60% earlier this week. However, the 2-year differentials with Germany, Japan, and the U.K. continue to make new cycle highs. This of course argues for further dollar strength against the euro, yen, and sterling. Elsewhere, the 10-year yield is trading at a new cycle high just below 2.70% while the real 10-year yield has risen to a new cycle high near -0.17%. This is the highest since March 2020 and appears to be headed into positive territory for the first time since the pandemic began. This too is dollar-positive.

Canada reports March jobs data. 79.9k jobs are expected vs. 336.6k in February, while the unemployment rate is seen falling a tick to 5.4%. If so, the rate would match the pre-pandemic low from May 2019 and supports the Bank of Canada’s assertion that slack in the economy has basically disappeared.

Bank of Canada tightening expectations are running hot. WIRP suggests a 50 bp hike at the April 13 meeting is fully priced in, while odds of a follow-up 50 bp hike at the June 1 meeting stand above 50%. Looking ahead, swaps market sees the policy rate peaking near 3.0% over the next 24 months. Overall, the economy remains strong even as inflation remains high and so the tightening cycle is shaping up to be very similar to what’s expected from the Fed.

Chile reports March CPI. Headline is expected at 8.7% y/y vs. 7.8% in February. If so, this would be the highest headline reading since November 2008 and further above the 2-4% target range. Last week, the central bank delivered a dovish surprise with a 150 bp hike to 7.0% vs. 200 bp expected. The bank noted more pessimism in consumer and business confidence and that activity is on a downward trend compared to last year. Looking ahead, the bank said that future hikes will be smaller under its base case scenario. Despite the dovish tilt, swaps market now sees the policy rate peaking near 8.25% over the next 6 months rather than 9.0% that was seen at the start of last week.

Brazil reports March IPCA inflation. Headline is expected at 11.00% y/y vs. 10.54% in February. If so, this would be the highest headline reading since November 2003 and further above the 2-5% target range. Next COPOM meeting is May 4 and a 100 bp hike to 12.75% is expected. Swaps market is pricing in a peak policy rate of 13.0% over the next 3 months. The central bank has tilted more dovish in recent weeks along with a more sanguine view on inflation. For now, the markets are buying into this scenario but we see still upside risks to inflation and rates.


The account of the March European Central Bank meeting tiled hawkish. On ending QE: “Some members preferred to set a firm end date for APP net purchases during the summer.” The ECB currently sees monthly APP falling to EUR20 bln in June but no end date. On liftoff: ending APP “could clear the way for a possible rate rise in the third quarter of this year in the light of the deterioration in the inflation outlook” while “Other members expressed a preference for adopting a wait-and-see approach.” The ECB currently sees liftoff “some time after” QE ends. On inflation: risks to the outlook “were seen as largely one-sided, with experience suggesting that wars tended to be inflationary.” New macro forecasts will be released at the June 9 meeting should reflect this. Panetta, Stournaras, Makhlouf, and Herodotou speak later today.

ECB tightening expectations remain heightened. Some major banks have moved their liftoff calls up to September from December previously. However, market pricing is way ahead of them as WIRP suggests odds of liftoff June 9 are over 55% while July 21 is fully priced in. Swaps market is pricing in 125 bp of tightening over the next 12 months, with another 75 bp of tightening is priced in over the following 12 months. This seems way too aggressive to us, especially in light of recent weakness in the real sector data. Next ECB decision is April 14 and the forward guidance then will be key. Spain reported February industrial output at 0.9% m/m vs. 0.5% expected and a revised flat (was-0.1%) in January. Elsewhere, Italy reported February retail sales at 0.7% m/m vs. 0.4% expected and a revised -0.6% (was -0.5%) in January.

Russia central bank delivered a surprise 300 bp rate cut to 17.0%. The bank noted that “External conditions remain difficult and curtail Russia’s economic activity. Risks to financial stability remain.” It added that inflation is no longer accelerating as fast as it had in the weeks immediately following the Ukraine invasion. Of note, March CPI data will be reported later today. This hike comes just weeks ahead of a regularly scheduled policy meeting April 29 and we cannot rule out another rate cut then if the ruble remains firm. That said, the exchange rate has lost any meaning under the current sanctions regime that led to capital controls. In a broader sense, Russia can cut rates under the so-called “Impossible Trinity.” Russia can have an independent monetary policy and target the exchange rate because it has limited free movement of capital flows.


Japan February current account data are worth discussing. An adjusted surplus of JPY517 bln was posted vs. JPY275 bln expected and a revised JPY184 bln (was JPY192 bln) in January. However, the investment flows will be of most interest. February data showed that Japan investors were net sellers of U.S. bonds for the fourth straight month and the -JPY3.13 trln sold was the biggest month since April 2020. Japan investors were net buyers (JPY186 bln) of Australian bonds in February but were net sellers of Canadian bonds (-JPY66 bln) for the first time since August. They were small net buyers of Italian bonds (JPY37 bln) for the second straight month. Elsewhere, Japan reported weak March consumer confidence. It was expected at 36.8 but instead fell to 32.8vs. 35.3 in February. It was the lowest since January 2021.

Reserve Bank of India delivered a hawkish hold. It kept the repo rate steady at 4.0%, as expected. However, the RBI said it is now focused on “withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.” The bank’s statement also dropped a pledge to keep policy loose “as long as necessary” for the first time since late 2019. The RBI raised its FY22 inflation forecast to 5.7% from 4.5% and introduced a standing deposit facility at 3.75% that will drain excess liquidity at a rate 40 bp above the current reverse repo rate at 3.35%. Governor Das stressed that “In the sequence of our priorities, we have now put inflation over growth,” adding that since February 2019, “we had put growth ahead of inflation in the sequence. This time we have revised that because we thought that the time was appropriate, and that is something that needs to be done.” Next policy meetings are June 8 and August 4. A rate hike is possible in June but we think August is more likely, which is consistent with Bloomberg consensus for Q3 liftoff.  

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