Dollar Firm as New Week Begins

March 21, 2022
  • Market pricing for Fed tightening continues to adjust after last week’s hawkish FOMC; U.S. rates continue to move in the dollar’s favor
  • ECB President Lagarde downplayed recession risks; Egypt’s central bank hiked rates unexpectedly
  • Chinese banks kept their Loan Prime Rates steady, as expected; regional trade data remain strong; Australia announced a ban on alumina and bauxite exports to Russia

The dollar is slightly firmer as the new week gets under way. DXY is up modestly for the second straight and trading near 98.30. This month’s new cycle high near 99.418 should eventually be tested and our next target remains the May 25 2020 high near 99.975. The euro has been unable to build on its post-ECB gains and is stuck below $1.11. We still expect an eventual test of this month’s cycle low near $1.08. GBP has been unable to break above $1.32 and remains heavy near $1.3140. We look for a test of this month’s new cycle low near $1.30 before eventually testing November 2020 low near $1.2855. USD/JPY traded Friday at the highest since February 2016 near 119.40 but has since fallen back slightly. This pair remains on track to test the January 2016 high near 121.70. After testing the 1.04 area last week, EUR/CHF is back trading near 1.02770 ahead of the SNB decision this Thursday. A break below 1.01367 is needed to set up a test of the cycle low below 1.00 from earlier this month. Between the likely return of risk-off impulses and the hawkish Fed outlook for tightening, we believe the dollar uptrend remains intact.

AMERICAS

Market pricing for Fed tightening continues to adjust after last week’s hawkish FOMC. WIRP is pricing in a 25 bp hike at each of the six remaining meetings this year, with nearly 90% odds of a 50 bp move at one of those meetings. Swaps market is pricing in 200 bp of tightening over the next 12 months followed by another 25 bp over the following 12 months that would see the Fed Funds rate peak near 2.5%. We have been calling for such a move for weeks now and we still see risks that the expected peak moves closer to 3% in the coming weeks.

U.S. rates continue to move in the dollar’s favor. The 2-year yield is back near the 2.0% cycle post-FOMC high. The 2-year differentials with Germany and Japan are making new cycle highs at 231 bp and 200 bp, respectively. The U.S. 10-year yield traded as high as 2.24% after the FOMC meeting but is currently trading just below 2.20%. As the extent of the Fed’s hawkishness becomes clearer and clearer in the coming days, U.S. yields should continue to move higher and support the dollar. Bostic and Powell both speak today while February Chicago Fed National Activity Index (0.50 expected) will be reported.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank President Lagarde downplayed recession risks. She noted that “even in the bleakest scenario, with second-round effects, with a boycott of gas and petrol and a worsening of the war that goes on for a long time -- even in those scenarios we have 2.3% growth.” She stressed that “We are not seeing elements of stagnation now.” Madame Lagarde would not comment on ECB policy except to say that it won’t move at the same pace as the Fed. She reiterated that “We are in different universes, at a different stage in the cycle, with different starting points. We in the euro area are at negative rates, while the U.S. never went below zero.” WIRP currently shows liftoff is priced in for the July 21 meeting. Looking ahead, the swaps market is pricing in 70 bp of tightening over the next 12 months, followed by another 50 bp over the following 12 months.

Egypt’s central bank hiked rates unexpectedly. The bank hiked its deposit and lending rates by 100 bp each to 9.25% and 10.25%, respectively. The MPC was scheduled to meet March 24 and this was the first hike at an unscheduled meeting since 2017. It noted that “Rising international commodity prices resulting from further supply chain disruptions in addition to increased risk-off sentiment have added to domestic inflationary pressures as well as external imbalances.” The bank also allowed the pound to weaken sharply after holding it steady for nearly two years, noting “Being keen on safeguarding the achieved macroeconomic stability, the Central Bank of Egypt stresses on the importance of the exchange rate flexibility to act as a shock absorber to preserve Egypt’s competitiveness.” Reports last week suggested Egypt is also in talks with the International Monetary Fund on a possible support program. We suspect today’s moves are meant to pave the way for some sort of loan.

ASIA

Chinese banks kept their Loan Prime Rates steady, as expected. A handful of the analysts polled by Bloomberg looked for small cuts in the LPRs but that will have to wait for now. Last week, the PBOC left its 1-year MLF rate unchanged at 2.85% vs. expectations for a 10 bp cut and so today’s decision was not surprising. Q1 data so far have come in on the firm side but more stimulus is needed in order to meet the optimistic growth target for this year of “around 5.5%.” We see another round of easing coming in early Q2.

Regional trade data remain strong. Taiwan reported firm February exports orders. Orders rose 21.1% y/y vs. 15.9% expected and 11.7% in January. This was the first acceleration and the strongest gain since September. Elsewhere, Korea reported firm trade data. Average daily exports for the first 20 days of March rose 26.4% y/y, down slightly from 32.6% for the first 10 days but up from 20.6% in February. There are clearly risks to the regional outlook stemming from the Ukraine crisis as well as the slowdown in Chinese growth and so markets should prepare for some weakness in Asian trade and activity in the coming months.

COMMODITIES

Australia announced a ban on alumina and bauxite exports to Russia. Australia is the largest exporter and provides nearly 20% of Russia’s supply of alumina. Alumina is the key ingredient for producing aluminum and is produced from bauxite ore. In turn, Russia is a key supplier of aluminum to countries that include Turkey, China, and Japan. Prime Minister Morrison said that the ban would take effect immediately.

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