Dollar Remains Under Pressure as US Yields Sink

April 14, 2021

US yields are crashing lower and removing some crucial support for the dollar; US CPI came in a tad higher than expected; heavy US Treasury issuance this week was easily absorbed; Fed Beige Book report will be released
Bank of France Governor Villeroy said that the ECB could end its PEPP by March 2022, as scheduled; despite the delays, the EU just set forth its debt issuance plans to finance the recovery fund; eurozone reported February IP; BOE Chief Economist Haldane will step down from the central bank after the June meeting
Japan reported weak February core machine orders; RBNZ delivered a dovish hold, as expected; MAS maintained its current accommodative stance

The dollar remains under pressure as US yields fall after CPI data.  With US data coming in strong this week, we still believe the dollar’s rise can resume.  However, this will require a turnaround in US yields and we’re not there yet.  DXY broke below near 92 and the next key retracement objective from the February-March rally comes in near 91.56.  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.  Sterling continues to underperform and has been unable to break back above $1.38 after finding support at the March 25 low near $1.3670.  Lastly, USD/JPY remains heavy and is trading below 109 for the first time since March 25.  The immediate target is the March 23 low near 108.40. 

AMERICAS

US yields are crashing lower and removing some crucial support for the dollar.  The 10-year yield  traded as low as 1.61% today, matching last week’s low that was the lowest since March 26.  Similarly, the 30-year yield  traded as low as 2.29% today, below last week’s 2.30% low that had been the lowest since March 25.  Both have come of their day’s lows but its clear the yields are struggling to move higher despite signs that the US economy remains on fire.  And until yields move higher again, the dollar is likely to struggle.

US CPI came in a tad higher than expected.  Both headline and core were a tick higher than consensus at 2.6% y/y and 1.6% y/y, respectively.  We think markets were relieved that it wasn’t a bigger upside surprise after PPI last week.  Markets are well aware that low base effects will boost the y/y rates for CPI in March, April, and May.  However, we did a little digging to get beyond these base effects by calculating 3-month change annualized and 6-month change annualized.  These rates are pretty eye-opening.  Headline CPI rose 6.8% and 3.5% by this measures, respectively, while core CPI rose 3.7% and 2.0%, respectively. We think this suggests that the price pressures are more than just base effects and needs to be watched closely.  While the core readings are still much lower than headline, the upward trend is undeniable.

Heavy US Treasury issuance this week was easily absorbed.  The 30-year auction was strong and that's helping to push US yields down.  Indirect bidders took 61.0% vs. 60.6% last month, while the bid-cover ratio was 2.47 vs. 2.28 last month.  Yesterday, the 3- and 10-year auctions were well-received.  The bond market basically shrugged off the CPI data and the supply and so the next hurdle will be retail sales Thursday.  We’re not "inflationistas" by any stretch but we do think the bond market is getting too sanguine about inflation risks.  That said, we have to respect the price action as the 10-year yield at 1.63% suggests little concern right now.

Fed Beige Book report will be released.  Since the last Beige Book release back on March 3, the US outlook has improved rather dramatically.  We expect this report to highlight increased economic activity and hiring across most Fed districts, though recent weekly claims data underscore the spotty nature of the job creation.  Kaplan, Powell, Williams, Clarida, and Bostic all speak today.  All in all, we do not expect the Fed to waver from its dovish message ahead of and at the upcoming FOMC meeting April 27-28.  March import/export prices will be reported.

EUROPE/MIDDLE EAST/AFRICA

Bank of France Governor Villeroy said that the ECB could end its PEPP by March 2022, as scheduled.  However, he stressed that this would not lead to an abrupt end to accommodation, noting that reinvestment would still go in.  He also said that the ECB could purchase assets through its other programs.  As always, the views within the ECB fall across a wide range, with Villeroy somewhere near the center.  Some hawks see an end to PEPP later this year, while the doves are reluctant to commit to any timetable yet.  That said, it’s clear that the ECB’s job has been made more difficult by the paralysis seen on the fiscal side.  The longer that the recovery fund is delayed, the more likely it is that the ECB will be forced to extend its QE.     

Despite the delays, the EU just set forth its debt issuance plans to finance the recovery fund.  The EU plans to issue EUR150-200 per annum through 2026 and aims to sell the first tranche of debt this June.  Almost a third of the EUR806 bln total planned will be in green bonds, using a framework of rules that will be published early this summer.  Bonds will be across a range of maturities between 3 and 30 years.  However, there will also be short-dated bill issuance, which the EU highlighted as a quick way to raise money in the initial phase of the program.  Of note, the size of the recovery fund was increased from the EUR750 bln agreed to last year that was based on 2018 prices.

Eurozone reported February IP.  It fell -1.0% m/m vs. -1.3% expected and 0.8% in January.  Elsewhere, Prime Minister Rutte announced lockdown measures in the Netherlands will be extended until at least April 28 as the pandemic  continues to strain the healthcare system.  It joins Germany, France, and Italy as the major eurozone economies going back into lockdown and so the Q2 outlook remains soft.  

Bank of England Chief Economist Haldane will step down from the central bank after the June meeting.  We think sterling may underperform a bit on the notion that Haldane was amongst the most hawkish on the MPC and now he is gone.  The short sterling strip so far is pretty much unchanged, however, and is still pricing in solid odds of potential lift-off late this year and a hike fully priced in by Q3 2022.  Heightened lift-off expectations had helped sterling outperform for much of this year, but all the good news has been priced in and not much of the bad.  Those negatives are likely to intensify as we move through Q2 and so sterling seems likely to underperform in the coming weeks.

ASIA

Japan reported weak February core machine orders.  They were expected to rise 2.5% y/y but instead plunged -8.5% and was nearly double the -4.5% drop in January.  Markets have already priced in a weak Q1 due to the pandemic restrictions, but forward-looking indicators were expected to show an improved outlook for Q2.   So far, the core machine orders have been disappointing.  Of note, the largest drop came from the service industry.  Overseas orders aren’t included in the headline reading and jumped 76%, the most since 2005.  We think this reflects both the improved global growth outlook and the impact of a weaker yen.

Reserve  Bank of New Zealand delivered a dovish hold, as expected.  It kept rates steady at 0.25% and maintained its QE at NZD100 bln.  However, it signaled that it is not yet thinking about removing stimulus, as “The committee agreed that, in line with its least regrets framework, it would not remove monetary stimulus until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives.  Given that uncertainty remains elevated, gaining this confidence is expected to take considerable time and patience.”  Of note, the bank said the growth outlook remains close to what it presented at its last meeting February 24.  It also said inflation is likely to exceed its 2% target “for a period” but stressed that this is likely to be temporary and said that impact of the government’s new policies on house prices (and therefore inflation and employment) will “take time to be observed.” 

The Monetary Authority of Singapore maintained its current accommodative stance by keeping its S$NEER trading  band unchanged, as expected.  The statement was slightly less dovish, however.  While repeating its previous forward guidance that “As core inflation is expected to stay low this year, MAS assesses that an accommodative policy stance remains appropriate,”  the MAS dropped the phrase “for some time.”  With the regional recovery taking hold, this tweak to the guidance was also no surprise,  The next scheduled meeting is in October.  While it’s possible that the MAS move to a less accommodative stance then, it will really depend in the data.  The MAS also noted that “The Singapore economy will grow at an above-trend pace this year, but the sectors worst hit by the crisis will continue to face significant demand shortfalls.”  In that regard, Q1 GDP came in stronger than expected, growing 2.0% q/q vs. 1.7% consensus and 3.8% in Q4.   

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