Dollar Firm as U.S. Yields March Higher

September 25, 2023
  • U.S. yields continue to rise after last week’s FOMC decision; Fed tightening expectations have yet to adjust significantly higher; the auto strike has widened while the writers’ strike has ended; August Chicago Fed National Activity Index will be the data highlight; regional Fed surveys for September will continue rolling out
  • ECB doves remain vocal; German IFO business climate for September came in mixed; U.K. CBI reported a firm September distributive trades survey; we may already have seen the end of the BOE’s tightening cycle
  • BOJ officials underscored the dovish hold in speeches today; the yen should continue to weaken; Japan reported firm August department store sales; Singapore reported August CPI

The dollar continues to gain as U.S. yields rise. DXY is up for the fourth straight day but has yet to break above Friday’s cycle high near 105.782. It remains on track to test the March high near 105.883 and break above that would set up a test of the November 30 high near 107.195. The euro is trading lower but has yet to break below Friday’s new cycle low today near $1.0615. Clean break below last week’s low near $1.0630 sets up a test of the March low near $1.0515. Sterling made a marginal new cycle low today near $1.2215 as the BOE’s dovish hold continues to weigh on the currency. Cable remains on track to test the March low near $1.18. USD/JPY traded at a marginal new cycle high today near 148.65 on dovish BOJ comments (see below) and remains on track to test 150 after the BOJ’s dovish hold. The fundamental story remains in favor of the greenback as the U.S. economy is in a much stronger position than the other major economies such as the eurozone or the U.K. With firm U.S. data expected to lead to an adjustment higher in Fed tightening expectations, this should feed into further dollar strength.


U.S. yields continue to rise after last week’s FOMC decision. The rates market is finally believing the Fed’s message of higher for longer. The 10-year yield traded near 3.72% July 19 and has risen to 4.50% today, while the 30-year yield traded near 3.83% July 19 and has risen to 4.60% today. The FX market has taken its cue from the rates market and continues to take the dollar higher, as DXY bottomed July 14 and has risen 6% since. Indeed, DXY has gained every week since that bottom for a streak of ten straight.

That said, Fed tightening expectations have yet to adjust significantly higher. WIRP suggests only 20% odds of a hike November 1, rising to 50% December 13. These odds are way too low given the Fed’s hawkish stance and should move higher if the data remain firm, as we expect. Fed officials are likely to push the higher for longer narrative this week. Kashkari speaks today and should provide some hawkish guidance.

The auto strike has widened. The UAW started strike action this past Friday at nearly forty GM and Stellantis plants but spared Ford from additional strikes, citing progress being made with that company. Estimates suggest this round of strikes will add about 5,600 workers for a total of 18,300 on strike, or about 12% UAW membership. Needless to say, a deal with Ford would put pressure on the other two to follow suit. The strike is only one week old and so it’s still too early to attempt an accurate tally of the economic costs. Suffice to say that the longer it goes on, the higher the costs of lost output and wages.

On the other hand, the writers’ strike has ended. Reports suggest the two sides have come to an agreement in principle but are still finalizing the language in the deal before officially ending the strike that began May 2. Recall that the BLS estimated that the writers’ strike accounted for -17k off of NFP. While it’s too late to be captured in the September data, the end of the strike should give a boost to October NFP. Current Bloomberg consensus for September NFP is 155k while its whisper number is 175k. We believe that despite the various strikes, the labor market remains very tight.

August Chicago Fed National Activity Index will be the data highlight. The headline reading is expected at 0.05 vs. 0.12 in July. If so, it would be the second straight month back in positive territory. Recall that a positive headline reading means the U.S. economy is growing above trend, which speaks to its ongoing resilience. Of note, the 3-month moving average would come in at -0.05 vs. -0.13 in July and would be the highest since last October. Also recall that the recession signal comes when the 3-month moving average hits -0.7 and we are far from that. This series has taken on greater significance given that the 3-month to 10-year curve remains deeply inverted. The continued resilience in the economy is noteworthy and suggests the Fed still has more work to do in getting to the desired sub-trend growth.

Regional Fed surveys for September will continue rolling out. Dallas Fed manufacturing and Philly Fed non-manufacturing surveys will be reported today. Dallas reading is expected at -13.0 vs. -17.2 in August.


ECB doves remain vocal. De Cos said “If we keep rates at these levels long enough, there are very good chances that we will be able to reach our 2% target in a timely manner.” Villeroy said “‘Testing until it breaks’ isn’t a sensible way to calibrate monetary policy. This suggests we should now focus on the persistence of policy rather than the constant pushing of rates higher - duration rather than level.” Even noted hawk Kazaks said that the September hike may allow for an October pause. Lagarde and Schnabel speak later today. Despite a few hawkish holdouts, the discussion at the ECB has clearly shifted from how high to how long. WIRP suggests only 5% odds of a hike October 26, then rising to top out near 25% December 14. The first cut is still seen around mid-2024.

German IFO business climate for September came in mixed. Headline remained steady at 85.7 as a drop in current assessment to 88.7 vs. 89.0 in August was offset by a rise in expectations to 82.9 vs. a revised 82.7 (was 82.6) in August. October GfK consumer confidence will be reported Wednesday and is expected at -26.0 vs. -25.5 in September. With its high degree of dependence on exports (especially to China), Germany remains the weak link in the eurozone.

The U.K. CBI reported a firm September distributive trades survey. Retailing reported sales came in at -14 vs. -35 expected and -44 in August, while total reported sales came in at -14 vs. -26 in August. This was the best reading for both since June, but it’s way too early to get excited about a recovery in consumption. Unemployment is rising, the economy has yet to go into recession, and monetary policy is likely to remain tight well into next year.

We may already have seen the end of the BOE tightening cycle. After last week’s dovish hold by the Bank of England, WIRP suggests only 35% odds of a hike November 2, rising to top out near 60% February 1. This is a far cry from the 6.5% peak policy rate that was priced in over the summer and so removes the sole pillar of support for sterling. The first cut is not expected until H2 2024.


Bank of Japan officials underscored the dovish hold in speeches today. Governor Ueda when he said in a speech today that the BOJ needs to continue with monetary easing “patiently” as its inflation target isn’t within sight yet. Ueda said that Japan is at a critical point to nurture “green shoots,” which supports our belief that bank officials are very concerned about removing accommodation too early. Deputy Governor Uchida used almost identical language in his speech, noting that the inflation target is not in sight yet even as uncertainties are very high for the Japanese economy. Uchida also said that the bank needs to keep up monetary easing “patiently.” We don't expect any change at the October 30-31 meeting. Of note, WIRP suggests nearly 75% odds of liftoff in December but that seems high given the BOJ’s dovish stance.

The yen should continue to weaken. USD/JPY is making marginal new highs today near 148.60 after trading sideways Friday. Perhaps fear of FX intervention is slowing the move higher but until the monetary policy divergence narrows, there's only one way for USD/JPY to go and that's up.

Japan reported firm August department store sales. Sales came in at 11.8% y/y vs. 8.6% in July and were the strongest since . Retail sales will be reported Friday and are expected at 6.6% y/y vs. 7.0% in July but there are upside risks after today’s sales data. Household spending will be reported next week.

Singapore reported August CPI. Headline fell a tick as expected to 4.0% y/y while core fell a greater than expected four ticks to 3.4% y/y. Headline is the lowest since January 2022 and core is the lowest since April 2022. While the MAS does not have an explicit inflation target, falling price pressures should allow it to keep policy on hold at the October meeting, with a possibility of easing at the April meeting. IP will be reported Tuesday and is expected at -3.6% y/y vs. -0.9% in July.

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