Dollar Remains Under Pressure Ahead of Key US Data

April 15, 2021

We are likely to get signs today that the U.S. economy continues to roar; March retail sales data will be the highlight; Fed manufacturing surveys for April will start to roll out; weekly jobless claims should show resumed improvement in the labor market; Fed Beige Book report is worth a mention
U.K. Minister David Frost travels to Brussels today to meet with EC Vice President Sefcovic to discuss the Northern Ireland issue; U.S. sanctions against Russia should be announced today, and it could involve local debt; Turkish central bank is expected to keep rates steady at 19.0%
Reports suggest the BOJ may raise its economic outlook modestly; Australia reported strong March jobs data; BOK kept rates steady at 0.50%, as expected; the much-awaited Coinbase IPO wasn’t as stellar as many had predicted

The dollar remains under pressure from low US yields ahead of key data.  We still believe the dollar’s rise can resume but this will require a turnaround in U.S. yields and we’re not there yet.  DXY tested a key retracement objective from the February-March rally today near 91.56.  A clean break below 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.  However, it is having trouble breaking above $1.20.  Sterling remains unable to break back above $1.38 after finding support recently at the March 25 low near $1.3670.  Lastly, USD/JPY remains heavy and continues to trade below 109.  The immediate target is the March 23 low near 108.40. 


We are likely to get signs today that the U.S. economy continues to roar.  Will it be enough to move U.S. yields higher?   We remain puzzled by relatively low yields in the face of very firm readings out of the U.S.  Part of this may be strong foreign demand for relatively high yielding US Treasuries, as suggested by the high share of indirect bidders that took down the huge slug of issuance this week.  The 10-year yield is having trouble breaking below 1.60%.  A break below would likely set up a test of the March 11 low near 1.47%, which seems unlikely in light of the strong U.S. outlook.    

March retail sales data will be the highlight.  Headline sales are expected to jump 5.8% m/m vs. -3.0% in February, while sales ex-autos are expected to jump 5.0% m/m vs. -2.7% in February.  The so-called control group used for GDP calculations is expected to rise an astounding 7.2% m/m vs. -3.5% in February.  The rebound is due to a combination of the stimulus checks and stellar job growth as more and more parts of the country reopened. 
Fed manufacturing surveys for April will start to roll out.  Empire survey will be reported and is expected at 20.0 vs. 17.4 in March.  Philly Fed survey will also be reported and is expected at 41.5 vs. 51.8 in March.  These are the first snapshots for April and will help set the tone for other data to come.  March IP will also be reported and is expected to rise 2.5% m/m vs. -2.2% in February.  The U.S. manufacturing sector remains solid, and services are expected to catch up as the vaccine roll out continues.  February TIC data and business inventories will also be reported. 

Weekly jobless claims should show resumed improvement in the labor market.  Regular initial claims are expected at 700k vs. 744k last week, while regular continuing claims are expected at 3.70 mln vs. 3.734 mln last week. Recent claims data have been disappointing.  Besides the recent rise in regular and initial claims, emergency continuing claims rose to an unadjusted 13.2 mln total from 12.9 mln the previous week.  The only bright spot in last week’s report was that regular plus emergency initial claims fell to an unadjusted 893k from 960k the previous week and matches the cycle low from mid-March.  Bottom line:  the labor market continues to heal but progress remains spotty week-to-week. 

Fed Beige Book report is worth a mention.  The report was based on information collected by the Fed’s 12 regional banks through April 5.  On overall economic activity:  “National economic activity accelerated to a moderate pace from late February to early April.  Consumer spending strengthened.  Outlooks were more optimistic than in the previous report, boosted in part by an acceleration in COVID-19 vaccinations.”  On inflation:  “Prices accelerated slightly since the last report, with many Districts reporting moderate price increases and some saying prices rose more robustly. Cost increases were partly attributed to ongoing supply chain disruptions, temporarily exacerbated in some cases by winter weather events. Contacts generally expect continued price increases in the near term.”  On employment and wages:  “Employment growth picked up over the reporting period, with most Districts noting modest to moderate increases in headcounts. Employment expectations were generally bullish. Wage growth accelerated slightly overall, with more significant wage pressures in industries like manufacturing and construction where finding and retaining workers was particularly difficult.”

Despite this more upbeat report, the Fed is not expected to do anything at the upcoming April 27-28 FOMC meeting.  Fed officials continue to hew the party line that any inflation is transitory and that the Fed won’t move until actual observed inflation runs consistently above its 2% target.  Of note, Fed Chair Powell said yesterday that rate lift-off is outcome-based and “highly unlikely” before 2022.  This is very interesting, as current Dot Plots suggest no lift-off before 2024.  He may be implicitly acknowledging that the markets are pricing in solid odds of  lift-off in H2 2022 and fully priced in by Q1 2023.  Bostic, Daly, Logan, and Mester all speak. 


U.K. Minister David Frost travels to Brussels today to meet with European Commission Vice President Sefcovic to discuss the Northern Ireland issue.  However, any breakthrough is seen as unlikely at this stage.  A U.K. official described the meeting as a start, while an E.U. official said the meeting was  meant to take stock of technical discussions that have taken place over the past few weeks.  Recall that the E.U. just postponed legal action against the U.K. for breaching the Northern Irish Brexit deal while it works with the U.K. to try and halt the escalating violence.  Proceedings began last month after the U.K. unilaterally extended a waiver of checks on some goods entering Northern Ireland beyond April 1.  The temporary exemption was part of the post-Brexit trade agreement but the border issue remains a serious, perhaps even an intractable problem.  An EU official said that any agreement was still many weeks away given the amount of work that remains to be done.

U.S. sanctions against Russia should be announced today, and it could involve local debt. Reports suggest the sanctions will focus on individuals and some 20 entities, but also might prevent U.S. financial institutions from trading newly issued sovereign debt.  The moves would  be a reaction to allegations that Russia interfered in the U.S. elections and the SolarWind hacks.  Markets were caught off guard as Biden’s recent summit invite to Putin suggested a slight thaw in relations.  Russian local bond yields are up as much as 11 bp, its 30-year Eurobond yield up 15 bp, and the currency is 1.6% weaker against the basket.
The Turkish central bank is expected to keep rates steady at 19.0%.  A couple of analysts look for a rate cut but we think it’s highly unlikely.  However, comments from Erdogan confirm his desire to cut rates rapidly and so there is some risk of a dovish surprise.  If there is no change today, then all eyes will quickly turn to the May 6 meeting for a potential cut.  The economy is suffering greatly from the pandemic and Erdogan is desperate to inject some stimulus quickly. But officials know the lira would implode if they go down that path. The lira continues its gradual recovery and is outperforming on the day, up 0.5%, but still some 15% weaker than from the February high.


Reports suggest the Bank of Japan may raise its economic outlook modestly.  Reports suggest the Outlook Report for the upcoming April 26-27 meeting will see slight upward revisions to the FY21 and FY23 growth forecasts from the current 3.9% and 1.8%, respectively.  Of note, FY23 forecasts will be added to the forecast horizon.  As far as its inflation forecasts go, BOJ officials reportedly see a possibility of a slight downgrade for FY21 due to one-off factors, including reduced costs for cell phone services.  Noe inflation is currently seen at 0.5% for FY21 and 0.7% for FY22, with many looking for a FY23 forecast near 1.0%.  At half the 2% target, this would suggest no tightening from the BOJ until FY24 at the earliest.

Australia reported strong March jobs data.  A whopping 70.7k jobs were added vs. 35.0k expected and 88.7k in February, while the unemployment rate fell a tick more than expected to 5.6%.  The only negative was that the entire gain was driven by part-time jobs, where a 91.5k gain was offset by a -20.8k drop in full-time jobs.  While the recovery continues and the labor market improves, the RBA (like the Fed) has made it quite clear that it is nowhere close to hiking rates.  For now, the RBA is benefitting from lull in global bond markets.  However, we believe this week may prove to be a crucial one for US yields and another leg higher would have global implications and the RBA would be likely be tested again.  Next policy meeting is May 4 and no policy change is expected then.

Bank of Korea kept rates steady at 0.50%, as expected.  Governor Lee acknowledged a pickup in growth but remained dovish as he stressed “The current stance needs to be maintained because we need to confirm whether the momentum for an economic recovery takes root as we watch the Covid situation unfold.” He added that stronger growth “stems more than anything from improving external conditions.” Lastly, Lee said he expects inflation to hover around the 2% target in Q2 before falling slightly in H2.  For now, we believe monetary policy will be kept at current accommodative settings through 2021.


The much-awaited Coinbase IPO wasn’t as stellar as many had predicted, at least as far as the initial price action.  Shares (COIN) opened at $380, peaked around $430, then closed at $328 (down 25% from the high). Based on the first day closing price, the company’s valuation stood at about $85 bln, failing to validate the $100 bln many had predicted. In any case, we expect the event to be a net positive for the crypto market. It serves as further visibility and validation, especially when added to increased corporate participation in the sector. The next step would be the approval of an ETF in the U.S. (following approval in Canada) and rolling up the Grayscale Trust (still trading at a deep discount to NAV) into a different wrapper. Bitcoin prices remain near record highs at $63,000 (+120% YTD), while Ethereum is well into new highs at just under $2,500 (+230% YTD).

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