Dollar Remains Under Pressure as New Week Begins

April 19, 2021

Bitcoin saw a roughly 10% flash crash over the weekend; US Treasury yields continue to tumble; the Trudeau government releases its 2021 budget
Weekly ECB asset purchases will be reported; Scottish politics remain in the news; tensions between the U.S. and Russia continue to rise; Israel is expected to keep rates steady at 0.10%
Japan reported strong March trade data

Bitcoin saw a roughly 10% flash crash over the weekend on a variety of alarming headlines, but most of them seem exaggerated or perhaps even unfounded. First, power outages in the Xinjiang region put an estimated 23.3% of global miners offline. This led to a drop of Bitcoin’s hashrate (a measure of network security). However, many observers noted that the drop was not far from its natural variance and that the network continued to function well, albeit with a minor slowdown. Second, there was a report claiming the U.S. Treasury will investigate crypto exchanges for money laundering. This not confirmed, and even if it was, it would ultimately be a positive step towards legitimizing these institutions. Third, the initial drop led to a massive deleveraging of extended long positions. Fourth, there were more headlines about India and Turkey restricting their citizens from using cryptocurrencies. All of this is happening just after the Coinbase IPO, which came off substantially after the initial move higher. We don’t think any of these factors change the fundamental story for Bitcoin which still seems supported by constrained supply and broadening institutional and retail investor adoption.
 
The dollar is likely to remain under pressure this week.  With only minor US economic data and no Fed speakers this week, markets are likely to continue selling the dollar near-term.  While we believe the fundamental backdrop favors a stronger dollar, this will require a big turnaround in US yields and we must respect the recent price action.  DXY is testing support at a key retracement objective from the February-March rally near 91.117.  A clean break below would target the February 25 low near 89.683.  Similarly, the euro is testing the $1.2035 level and a break above would set up a test of the February 25 high near $1.2245, but so far has been unable to pierce $1.20.  Sterling finally made a clean break above $1.38 and is testing the April 6 high near $1.3920.  Break above that would target the March 18 high near $1.40.  Lastly, USD/JPY remains heavy and is testing the 108 level.  Keep an eye on the 107.25 level as a break below would set up a test of the February 23 low near 104.90. 

AMERICAS

US Treasury yields continue to tumble.  The 10-year yield fell back to 1.55% today and is nearing last week’s 1.53% low.  This continues its gradual declining path since the high of 1.77% at the end of March.  Of note, real yields have also declined along with nominal yields, suggesting inflation expectations haven’t moved as much. In fact, breakeven inflation rates have been slowly trending higher over the last few weeks but have plateaued in April.  We still like the dollar higher but this drop in U.S. yields continues to confound us.  Looking ahead to this week, there’s not a lot for the markets in terms of guidance.  The media embargo kicked in at midnight last Friday and so we will get no more Fed speakers until Chair Powell’s post-decision press conference next Wednesday April 28.
 
The Trudeau government releases its 2021 budget.  This is the first official release in two years, as the 2020 budget was of course waylaid by the pandemic.  Officials have already flagged as much as CAD100 bln ($80 bln) in additional spending over the next three years, but a larger figure can’t be ruled out as Trudeau looks ahead to the elections.  Finance Minister Freeland has described this budget as “among the most significant of our lifetime” and so expectations are high.  With fiscal policy doing the heavy lifting now, the Bank of Canada may start to remove some of its emergency measures.  The bank meets this Wednesday and is expected to start tapering its weekly bond purchases modestly.  We will send out a preview early this week.

EUROPE/MIDDLE EAST/AFRICA

Weekly ECB asset purchases will be reported.  The previous week, purchases picked up despite the Easter Monday holiday.  Net purchases were EUR17.1 bln that week, up from the previous week’s EUR10.6 bln that was about half the pace seen for the two weeks prior.  Redemptions were quite large at EUR4.2 bln and so gross purchases of EUR21.3 bln were near the recent highs from March.  We expect this accelerated pace to be maintained until at least the June meeting, when the ECB will likely reassess the need.  Much will depend on whether global bond yields will recover from this current slump.  The ECB meeting this Thursday is not expected to yield any policy changes but the forward guidance will be watched closely. 

Scottish politics remain in the news.  Latest U.K. poll shows that about 51% believe Scotland should be allowed to hold a second independence referendum within five years if the Scottish National Party wins a majority in the May 6 elections.  This compares with about 40% who believe the U.K. government should block a referendum.  U.K. Prime Minister Johnson has so far refused to consider another referendum regardless of the results of the Scottish parliamentary elections.  Other recent polls suggest the SNP will win a slim majority and that pro-independence parties will hold a 60% super-majority in the Scottish parliament.

Tensions between the U.S. and Russia continue to rise. Imprisoned opposition leader Alexey Navalny’s health seems to be deteriorating fast, leading to heightened risks of anti-government demonstrations and reprisals from world leaders.  Navalny is currently on a 2 ½ week (and counting) hunger strike. Officials from U.S. and France have spoken out about the about the matter.  From a markets perspective, our view remains unchanged: Russian asset prices now command an even higher political risk premium and, despite the countries outstanding fundamentals, we think the risk-reward favors other commodity plays such as those in Latin America.
 
Bank of Israel is expected to keep rates steady at 0.10%.  CPI rose 0.2% y/y in March, the highest since January 2020 but still well below the 1-3% target range.  Ahead of the decision, Israel reports March trade data that day.  Export growth has been slowing significantly and so we expect the central bank to reiterate its weak shekel policy.  We also expect the bank to call for fiscal stimulus, something that has been lacking due to ongoing political uncertainty.

ASIA

Japan reported strong March trade data.  Exports jumped 16.1% y/y vs. 11.4% expected and -4.5% in February, while imports rose 5.7% y/y vs. 4.7% expected and 11.8% in February.  Export growth was the strongest since November 2017, leading to higher than expected adjusted surplus of JPY298 bln.  Exports were boosted by the strongest shipments to Asia (+22.4%) in over three decades. Exports to China rose 37.2% y/y, though exaggerated by base effects. Exports to the U.S. and Europe continue to recover.  The yen is outperforming on the day, up 0.6% against the dollar and continues its sharp rally (appreciating over 2% since the start of the month).
 

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