Dollar Gains Traction Ahead of CPI Data and 30-year Auction

April 13, 2021

US inflation data will come back into focus; US yields are creeping higher and giving the dollar some support; all of this comes on top of heavy US Treasury issuance this week
Delays to the EU recovery fund continue; weekly ECB asset purchases picked up despite the holiday last Monday; eurozone data came in weak; UK February data dump was mixed
Reports suggest Treasury Secretary Yellen will not name China as a currency manipulator; we see no implications for the yuan, which should continue to trade along with the broader EM FX; China reported March trade

The dollar is getting some traction as US yields rise ahead of CPI data and a 30-year auction.  With US data expected to come in strong this week, we believe the dollar’s rise can continue and perhaps even intensify.  DXY has found support near 92 for the past four sessions but has not yet been able to break above the 200-day moving average that’s currently near 92.329.  Likewise, the euro rally has fun into stiff resistance near $1.19, which coincides with its 200-day moving average.  Sterling has been unable to break back above $1.38 after finding support at the March 25 low near $1.3670.  Lastly, USD/JPY has been unable to break back above 110 and has been stuck in the 109-110 range in recent days. 


US inflation data will come back into focus.  March CPI will be reported today, with headline expected at 2.5% y/y vs. 1.7% in February and core expected at 1.5% y/y vs. 1.3% in February.  Last week, March PPI came in higher than expected, with headline at 4.2% y/y vs. 3.8% consensus and 2.8% in February and core at 3.1% y/y vs. 2.7% consensus and 2.5% in February.  While there is never a one-to-one correlation, the PPI readings point to upside risks to the CPI data.  Some acceleration is to be expected due to low base effects that will boost y/y readings in March, April, and May.  However, there is a growing belief in the markets that inflation isn’t as transitory as the Fed believes.  Annualized 3-month and 6-month changes are showing clear acceleration and bears watching.  Harker, Daly, Barkin, Mester, Bostic, and Rosengren all speak. 

US yields are creeping higher and giving the dollar some support.  The 10-year yield  is trading around 1.69%, up from last week’s 1.61% low that was the lowest since March 26.  Still, the 10-year remains  well below the March 30 peak near 1.77% and a break of the 1.71% level is needed to set up a test of that cycle peak.  Similarly, the 30-year yield  is trading around 2.35%, up from last week’s 2.30% low that was the lowest since March 25.  Here too, the 30-year yield remains well below the March 18 peak near 2.51% and break of the 2.40% level is needed to set up a test of that cycle peak.

All of this comes on top of heavy US Treasury issuance this week.  Yesterday’s $58 bln 3-year and $38 bln 10-year auctions were both relatively strong.  Indirect bidders, which largely represent foreign buyers, rose to 51.1% and 59.6% from 47.8% and 56.8% at last month’s auctions, respectively.  Bid-to-cover ratios were not as strong, which fell to 2.32 and 2.36 from 2.69 and 2.38 at last month’s auctions, respectively.  Today, there will be a $24 bln 30-year bond  auction.  At last month’s 30-year auction, indirect bidders took 60.6% and the bid-to-cover ratio was 2.28.  


Delays to the EU recovery fund continue.  Poland’s government unexpectedly cancelled plans to discuss its ratification as tensions rise in the ruling coalition.  Deputy Speaker Terlecki said that parliament may have to gather for an extra sitting later this month to meet the deadline to ratify the program, which suggests there are currently not enough votes to pass it.  Poland is in line to receive EUR58 bln euros from the fund, but intra-party bickering has grown.  Indeed, Law and Justice head Kaczynski warned last week that the three-party ruling coalition is at risk of collapse unless the plan is approved.  Of note, hardline Justice Minister Ziobro has vowed to oppose the fund on the grounds that it may make Poland liable for the debts of Greece and other debtor nations.  He also argued that tying the disbursement of funds to the so-called rule of law gives Brussels too much control over Poland.  Sound familiar?

This is clearly zloty-negative, but also underscores the reasons to be negative on the euro too.  Poland is not the only hurdle, as the recovery fund has also gotten tied up in the German courts.  We are coming up on nearly a year since the recovery fund was supposedly finalized and yet as the French Finance Minister pointed out recently, not a penny has been spent.  Without this  added fiscal support, it is up to the individual governments and the ECB to provide stimulus.

Weekly ECB asset purchases picked up despite the holiday last Monday.  the ECB reported net purchases of EUR17.1 bln last week, up from the previous week’s EUR10.6 bln that was about half the pace seen for the two weeks previous.  We will get more details today about redemptions and gross purchases for last week.  The ECB account of the March meeting shows that the accelerated pace of purchases was seen as temporary.  We expect the accelerated pace to be maintained until at least the June meeting, when the ECB will likely reassess its program. 

Eurozone data came in weak.  Italy reported February IP up only 0.2% m/m, a third of the consensus 0.6% and down from a revised 1.1% gain (was 1.0%) in January.  Eurozone February IP will be reported Wednesday and is expected at -1.2% m/m vs. 0.8% in January.  April ZEW survey was also reported softer.  Eurozone expectations fell to 66.3 from 74.0 in March, the lowest since January and the first drop since November.  Of note, German expectations fell to 70.7 from 76.6 in March while current situation expectations rose to -48.8 from -61.0 in March.

UK February data dump was mixed.  IP rose 1.0% m/m vs. 0.5% expected and a revised -1.8% (was -1.5%) in January, construction rose 1.6% m/m vs. 0.5% expected and a revised flat (was 0.9%) in January, services rose 0.2% m/m vs. 0.6% expected and a revised -2.5% (was -3.5%) in January, and GDP rose 0.4% m/m vs. 0.5% expected and a revised -2.2% (was -2.9%) in January.  Lastly, a huge trade deficit of -GBP7.1 bln was reported vs. -GBP2.4 bln expected.  With the lockdowns easing and vaccinations rising, January may have been the worst of it for the UK economy. However, it’s clear from the limited pace in February that it will take months and months to fully recover.  


Reports suggest Treasury Secretary Yellen will not name China as a currency manipulator in her first semiannual FX report. The report is not yet finalized and is due out Thursday.  Furthermore, reports suggest that Treasury has discussed the possibility of reversing the Trump administration’s decision in May 2019 to lower thresholds for the criteria used to determine if a country is manipulating its currency.  The threshold for the current account surplus was lowered from 3% of GDP to 2%.  The criteria for persistent one sided intervention was also modified.  A country was now flagged if net purchases are conducted in at least 6 out of 12 months (vs. 8 previously) and these net purchases total more than 2% of GDP over a 12-month period.  Current Treasury officials admitted that this reversal could lead to a fewer number of nations under scrutiny by nearly half. 

In the last report from December 2020, the so-called Monitoring List was made up of China, Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India.  Movements of note in that report:  1) Switzerland and Vietnam were designated currency manipulators, 2) Taiwan, Thailand, and India were placed on the monitoring list, and 3) Ireland was removed from the monitoring list.  That was the first report since January 2020.  In previous administrations, the semi-annual reports were typically released in April and October.  However, the trade war disrupted this cycle.  In 2019, only one report was issued and that was in May.  In between reports, China was designated a currency manipulator in August 2019 despite meeting inly one of the criteria.  That designation was the final sign that under President Trump, the report had become highly politicized.  That is likely to change under President Biden. 

We see no implications for the yuan, which should continue to trade along with the broader EM FX.  However, the PBOC has allowed only limited  weakness so far this year and we expected this to continue.  CNY is one of the top performers in EM, down only -0.3% vs. the dollar YTD.  This is behind only ZAR (+0.8%), CLP (flat), and PEN (-0.1%).   If dollar strength reasserts itself as we expect, USD/CNY should continue to move higher.  Retracement objectives from the November-January drop come in near 6.5480 (38%), 6.5865 (50%), and 6.6250 (62%).  

China reported March trade.  Exports rose 30.6% y/y vs. 38.0% expected and imports rose 38.1% vs. 24.4% expected.   This led to a surplus of $13.8 bln.  It’s worth noting that China’s overall surplus has surged over the past year, with the 12-month total at $638 bln vs. $361 bln in March 2020.  The bilateral surplus with the US did fall to $311 bln in 2020 from $345 bln in 2019 and a peak $420 bln in 2018, but it appears China has managed to maintain a strong external position by shifting its exports to other countries.  Of note, the current account surplus rose to 2% of GDP in 2020 from around 1% in 2019, according to IMF data.  While a far cry from surpluses near 10% of GDP back in 2006-2008, the 2% surplus along with the bilateral surplus with the US means China still belongs on the Monitoring List using the current criteria.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction