Dollar Firms Ahead of FOMC Meeting

April 27, 2021

-The two-day FOMC  meeting begins today and ends with a decision tomorrow afternoon; Fed manufacturing surveys for April will continue to roll out; Brazil reports mid-April IPCA inflation. 
-The pace of ECB asset purchases remains elevated; reports suggest Poland is set to ratify the EU recovery fund this week; Riksbank delivered a dovish hold, as expected; Hungary is expected to keep rates steady at 0.60%
-The BOJ delivered a dovish hold and new forecasts were unveiled; several countries are mobilizing to aid India in its struggle with the virus; Korea reported strong Q1 GDP data

The dollar is getting some modest traction ahead of the FOMC meeting.  DXY traded at new lows for this move yesterday near 90.682 but today’s bounce saw it trade back above 91.  The euro was unable to sustain the move above $1.21 yesterday and is currently trading just below.  Sterling traded above $1.40 last week but has struggled after the lack of any follow-through buying and remains stuck in a $1.39-1.40 range for now.  Lastly, USD/JPY is showing signs of life after trading below 108 for several days and is trading at the higher level since April 20 near  108.40.  We continue to look for resumed dollar strength but this will require a significant turnaround in U.S. yields.
 

AMERICAS

The two-day FOMC  meeting begins today and ends with a decision tomorrow afternoon.  No changes are expected in any policy settings or forward guidance.  There will be no new macro forecasts or Dot Plots.  As we noted yesterday, markets are starting to look for signs of tapering and Powell will surely be asked about the timing.  The latest Bloomberg survey shows growing expectations of Fed tapering in Q4.   About 45% of the economists responding expect the Fed to announce tapering in Q4, with 14% seeing an even earlier start in Q3.  That means nearly 60% see tapering announced this year.  The results are a noticeable shift from its March survey, when a majority 51% of respondents saw tapering as a 2022 or later event. 

Recall that the Fed is buying $120 bln per month of USTs and mortgage-backed securities.  We will be sending out a piece later today that sets forth a potential road map for the eventual removal of monetary stimulus by the Fed.  Simply put, if the Fed wants to taper before year-end, it will have to start talking about it by mid-year.  That leaves the June 15-16 meeting as the most likely candidate, followed by the July 27-28.  This week’s meeting seems too soon to make an official statement but minutes may show that the conversation was started.  Of note, the minutes to the March 16-17 meeting showed that tapering was not even discussed then.  The 10-year UST yield is currently stuck around 1.58% and the 30-year around 2.26%, both firming off their recent lows but well below their March highs near 1.77% and 2.51%, respectively.  The bond market may be wary of making any big bets ahead of the FOMC decision tomorrow.  

Fed manufacturing surveys for April will continue to roll out.  Richmond Fed survey is expected at 22 vs. 17 in March.  So far, Dallas came in at 37.3 vs. 28.9 in March, Kansas City came in at 31 vs. 26 in March, Philly came in at 50.2 vs. 44.5 in March, and Empire survey came in at 26.3 vs. 17.4 in March, all stronger than expected.  The U.S. manufacturing sector remains in very solid shape, with services expected to catch up quickly as lockdowns end. February S&P/CoreLogic house prices and April Conference Board consumer confidence (113.0 expected) will also be reported.

Brazil reports mid-April IPCA inflation.  It is expected to accelerate to 6.23% y/y from 5.52% in mid-March.  If so, this would be the highest since November 2016 and further above the 2.75-5.25% target range.  Next COPOM meeting is  May 5 and the CDI market is pricing in a 75 bp move, followed by another 75 bp at the June 16 meeting.  The last move was a 75 bp hike to 2.75% at its meeting in March that kicked off this tightening cycle.

EUROPE/MIDDLE EAST/AFRICA

The pace of ECB asset purchases remains elevated.  Yesterday, the ECB reported net asset purchases of EUR22.25 bln for the week ending April 23, up from a net EUR16.3 bln for the week ending April 16 and  EUR17.1 bln for the week ending April 9.  This is the highest weekly net purchase amount since June 2020 and so the accelerated pace remains in place.  ECB will report redemptions today and so we can figure out gross purchases.  That said, for the week ending April 16, redemptions were a whopping EUR12.1 bln and so gross purchases were EUR28.4 bln, the largest since June 2020.

Reports suggest Poland is set to ratify the EU recovery fund this week.  A split within the ruling coalition had threatened the deal, with the main Law and Justice Party unable to get coalition members on board. Prime Minister Morawiecki has confirmed that Law & Justice is consulting with the opposition and reports suggest opposition lawmakers are saying the deal will be ratified with their support.  However, the opposition will undoubtedly demand some concessions and stopped short of saying it was a done deal.  The opposition reportedly wants local and municipal authorities to get more oversight of the recovery funds in order to ensure they will be spent fairly and are leery of giving the federal government full control over the funds ahead of general elections due in 2023.

Sweden’s Riksbank delivered a dovish hold, as expected.  The bank said that “monetary policy needs to remain expansionary to support the economy and for inflation to be close to the target of 2% more permanently.”  It kept rates steady at 0.0% and maintained its QE program at SEK700 bln.  Of note, the bank last expanded its QE by SEK200 bln at its meeting last November. Similar to February, the Riksbank said that its QE program will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022.  At the same time, the bank again noted that it’s possible for the repo rate to be cut if needed, but we  believe it does not want to go negative again and will instead rely on further QE if more stimulus is needed. 

The flat rate path was extended another quarter to Q2 2024.  The Riksbank raised its 2021 and 2022 inflation forecasts to 1.4% (1.3% previously) and 1.5% (1.3% previously), respectively, but cut its 2023 forecasts to 1.7% (1.8% previously).  Of note, the forecasts still see inflation not reaching the 2% target until early 2024.  The Riksbank also raised its 2021 growth forecast to 3.7% (3.0% previously) but cut its 2022 and  2023 forecasts to 3.6% (3.9% previously) and 2.0% (2.4% previously), respectively.

National Bank of Hungary is expected to keep rates steady at 0.60%.  CPI rose 3.7% y/y in March, the highest since last August and nearing the top of the 2-4% target range.  However, the bank has already flagged an expected spike in inflation to near 5% y/y in Q2 as temporary due largely to base effects.  Bloomberg consensus sees steady rates until mid-2022, after which the odds of a hike start to rise very modestly.  We concur, although we think the risks are tilted toward a later lift-off, not sooner. 

ASIA

The Bank of Japan delivered a dovish hold.  The policy rate remains at -0.1% and the 10-year yield target at 0.0%. Recall that the bank unveiled its policy review at its last meeting March 19 and widened its target range for the 10-year JGB yield to +/- 25 bp around 0% vs. +/- 20 bp previously.  In a lengthy analysis, the BOJ concluded that capital spending is mostly unaffected by fluctuations that are within 0.5 percentage point.  This suggests it is unlikely that the bank will widen the band further. Governor Kuroda said “We expect long-term rates to move around the range we clarified. The BOJ does not plan to intentionally create volatility. We expect yields to move reflecting economic and price developments." 

New forecasts were unveiled. The bank sees targeted core inflation at 0.1% (0.5% previously) for FY2021, 0.8% (0.7% previously) for FY2022, and 1.0% for FY23, which was just added to the forecast horizon.  Of note, the downward revision to FY21 was partially due to a reduction in mobile phone costs.  Still, the bottom line is that even with these policy tweaks, inflation is likely to remain below the 2% target through FY23 as well.  As such, the BOJ will signal that it intends to keep policy accommodative until FY24 at least.  Growth is forecast at 4.0% (3.9% previously) for FY2021, 2.4% (1.8% previously) for FY2022, and 1.3% for FY23
 
Several countries are mobilizing to aid India in its struggle with the virus. New infection rates have been over 300,000 for nearly a week now while the total fatality rate is nearly at 200,000. The U.S. announced it would share its AstraZeneca vaccine supply with other countries, and surely a large portion will go to India. The rupee is one of the weakest currencies this month, down 2% against the dollar despite broad appreciation for most major EMs currencies. Equities have also underperformed but are still in positive territory for the year.
 
Korea reported strong Q1 GDP data.  The economy grew 1.6% q/q vs 1.1% expected and 1.2% in Q4.  This boosted the y/y rates to 1.8% vs. 1.2% expected and -1.25 in Q4.  For now, the regional recovery and strong global chip demand are boosting the recovery.  And it’s not just exports, as March retail sales surged  18.5% y/y vs. 10.0% in February.  With Korea the regional bellwether, its strong economic performance bodes well for the rest of Asia.  Note March IP will be reported Friday and is expected to rise 4.2% y/y vs. 0.9% in February, followed by April trade data to be reported Saturday local time.  Exports are expected to rise 44.0% y/y vs. 16.5% in March, while imports are expected to rise 29.7% y/y vs. 18.8% in March.   

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