Dollar Down for the Fifth Straight Day

April 16, 2021

Yesterday’s US data was simply stellar; the US growth outlook remains very strong; yet bond yields tumbled yesterday; data today are minor
Italy submitted its 2021 budget and it wasn’t pretty; the U.K. and the E.U. will meet again in the next two weeks to continue working  on the issue of Northern Ireland; the U.S. government confirmed yesterday’s reports about sanctioning new Russian bonds
Japan Prime Minister Suga is in Washington and will be the first foreign leader to meet in person with President Biden; China’s data were mixed

Cross-market measures of implied volatility continue to decline. Of note, the MOVE index for the U.S. Treasury market is mean-reverting and at 59 is well off the year’s high of around 80. That said, it’s got a long way to go before reaching the recent lows around 45. The VIX is comfortably below 17, and aggregate G7 FX vol (VXY index) is at its lowest in a year.
The dollar remains under modest pressure, with DXY down for the fifth straight day.  With US data coming in very strong this week, we still believe the dollar’s rise can resume.  However, this will require a big turnaround in US yields and we’re not there yet.  DXY broke below near 92 but support near 91.50 has held for now.  A key retracement objective from the February-March rally comes in near 91.56.  A clean break below that would target the February 25 low near 89.683.  Similarly, the euro needs to break above the $1.2035 area to set up a test of the February 25 high near $1.2245, but so far has been unable to pierce $1.20.  Sterling continues to underperform and has been unable to make a clean break above $1.38, and so the EUR/GBP cross traded today at the highest since February 26.  Lastly, USD/JPY remains heavy and continues to trade below 109.  The immediate target is the March 23 low near 108.40. 


Yesterday’s US data was simply stellar.  Headline retail sales surged 9.8% m/m vs. 5.8% expected, sales ex-autos rose 8.4% m/m vs. 5.0% expected, and the so-called control group used for GDP calculations rose 6.9% m/m vs. 7.2% expected.  Back months were revised up.  Elsewhere, weekly initial jobless claims came in at 576k vs. 700k expected.  Empire manufacturing survey came in at 26.3 vs. 20.0 expected, while the Philly Fed survey came in at 50.2 vs. 41.5 expected.  The only big downside miss yesterday was IP, which rose 1.4% m/m vs. 2.5% expected.

The US growth outlook remains very strong.  The Atlanta Fed’s GDPNow model suggests Q1 growth is 8.3% SAAR, while the New York Fed’s Nowcast model suggests Q1 and Q2 growth of 6.1% and 1.5% SAAR, respectively.  Both models will be updated today.  Of note, Bloomberg consensus for Q1 is currently at 5.4% SAAR, picking up to 8.1% SAAR in Q2 before easing to a still stellar 7.0% in Q3.  And this is before the next two rounds of stimulus have been accounted for.  The same consensus sees core PCE picking up to 2.2% y/y in Q2 from 1.5% in Q1 before edging back down to 1.8% in Q3 and 2.0% in Q4.

Yet bond yields tumbled yesterday.  Despite the 10-year yield falling to as low as 1.53%, the dollar held up OK as support near 91.50 has held for now.  That yield has recovered to around 1.57% currently but the dollar hasn’t really benefitted.  We still like the dollar higher but this drop in US yields continues to confound us.

Data today are minor.  March building permits (1.7% m/m expected), housing starts (13.5% m/m expected), and preliminary University of Michigan consumer confidence (89.0 expected) will be reported by the US.  Canada reports February wholesale trade sales and March housing starts.  The Fed’s Kaplan speaks.  After that, the media embargo kicks in at midnight and we will get no more Fed speakers until Chair Powell’s post-decision press conference April 28.


Italy submitted its 2021 budget and it wasn’t pretty.  The budget deficit is forecast at -11.8% of GDP, which would result in a new all-time high debt/GDP of 159.8%.  The deficit is seen narrowing to -5.9% of GDP in 2022, with debt/GDP seen falling to 156.3%.  The government doesn’t foresee a deficit below -3% of GDP until 2025, while debt is not expected to return to the pre-crisis level of 134.6% until the end of the decade.  The budget assumes a growth forecast of 4.1% this year.   The forecasts are the first full set since Draghi took over as head of a caretaker government.  While they are worrisome, we think markets holds much respect and markets will give him the benefit of the doubt.  At least for now.  10-year spreads to Germany have crept up in recent  days but at a mere 34 bp, it remains near the cycle low near 28 bp and well below the 2020 peak near 230 bp.

The U.K. and the E.U. will meet again in the next two weeks to continue working  on the issue of Northern Ireland.  As expected, talks in Brussels yesterday  between Frost and Sefcovic yielded no breakthroughs.  Still, the U.K. referred  to some “positive momentum” while the E.U. said the two “used the occasion to take stock of all outstanding issues.”  An E.U. official had warned before the meeting that a deal would still be many weeks away.  To us, it seems like an intractable problem.  Barring some sort of miracle, some sort of hard border will become necessary after Brexit.  If that border is in the Irish Sea, then loyalists in Northern Ireland will resist.  If the border is on the island of Ireland, then  it undermines the peace accord under the Good Friday Agreement.  Both sides kicked the can down the road in order to get Brexit done but the uncertainty has come back to haunt them due to the pandemic and vaccine tensions.

The U.S. government confirmed yesterday’s reports about sanctioning new Russian bonds. The executive order (link here) mentioned “harmful foreign activities of the Government of the Russian Federation — in particular, efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners,” as well as harmful cyber-activities and fostering transnational corruption. The order sanctioned nearly 40 entities and individuals. We take this as an important sign of escalation, but it certainly could be worse as the measure doesn’t prevent institutions from transacting Russia securities in the secondary market. Yet.  As a result, it means that investors in the country’s assets will have to accept this indefinite risk premium, which may be enough to prevent many from investing all together. After all, there is no scarcity of commodity plays in EM or DM. We await Russia’s retaliation, but we doubt it will be too strong.



Japan Prime Minister Suga is in Washington and will be the first foreign leader to meet in person with President Biden.  Reports suggest the two will issue a statement on tensions in the Taiwan Strait and announce a $2 bln initiative on 5G technology.  The summit is meant to  meeting build on Secretary of State Blinken’s first visits abroad last month to Japan and South Korea, and suggests that Biden’s main focus will be on China and limiting its efforts at regional hegemony.  While this may help burnish his popularity ahead of fall elections, we think he will remain unpopular enough to force Suga to pass another budget over the summer. 

China’s data were mixed.  Q1 GDP came in as expected, retail sales surprised on the upside and industrial production on the downside. The recovery remains robust, but base effects were a big factor behind the 18.3% y/y rise in GDP.  Indeed, q/q growth slowed to 0.6% from a revised 3.2% (was 2.6%) in Q4.  Industrial production disappointed at 14.1% y/y in March (18.0% expected), while retail sales rose 34.2% y/y, well above the 28.0% expected. In other words, in line with the dual-circulation objective. All in all, the outlook remains constructive and reinforces our call for a targeted and gentile removal of accommodation by the PBOC. It’s also worth keeping an eye on the impact of global chip shortage on China’s data going forward.

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