Dollar Finds Some Traction as Europe Returns From Holiday

April 06, 2021
  • President Biden’s path to the next round of stimulus just got easier; the US economy continues to roar; while US long yields have stabilized for now, market expectations for Fed tightening continue to adjust
  • Weekly ECB asset purchases will be reported; Russia reports March CPI
  • Japan reported February real cash earnings and household spending; RBA delivered a dovish hold; Caixin reported March services and composite PMI readings

The dollar has resumed its climb. Yesterday’s sell-off saw DXY trade below 93 but found support near 92.50. Despite this minor setback, the fundamental story remains positive for the dollar (see below). The recent break above the November 11 high near 93.208 sets up a test of the November 4 high near 94.302. The euro remains heavy and is likely to break back below $1.18. We believe it is still on track to test the November low near $1.1605. Sterling had been outperforming but succumbed to dollar strength today and is testing the $1.38 area. We believe it is still on track to test of the February 4 low near $1.3565. The rise in USD/JPY has resumed after testing the 110 area. Last week’s break above the June 5 high near 109.85 sets up a test of the March 2020 high near 111.70.



President Biden’s path to the next round of stimulus just got easier. The Senate Parliamentarian has ruled that the Democrats can enact another reconciliation packaged by simply revising the budget blueprint that was adopted for the last $1.9 trln package. This means that the proposed $2.25 trln infrastructure package can be passed with just a simple majority too rather than the usual 60 votes needed. That said, there is still resistance to some portions of the proposed package from within Biden’s own party, with Senator Manchin of West Virginia already demanding some changes. Given the 50-50 split in the Senate, there is simply no margin for error.

The US economy continues to roar. March ISM services PIM came in at a whopping 63.7 vs. 59.0 expected and 55.3 in February. This was the highest on record since the series began in 1997. The details were strong with employment component rising to 57.2, the highest since May 2019. Prices paid component rose to 74, the highest since July 2008. The US economy is really picking up momentum as we move into Q2. February JOLTS job openings will be reported today and are expected at 6900 vs. 6917 in January.

While US long yields have stabilized for now, market expectations for Fed tightening continue to adjust. A hike by mid-2022 is nearly a third priced in by the Fed Funds futures strip, moving to being almost fully priced in by end-2022. This is at odds with the Fed's Dot Plots showing no hikes through 2023, to state the obvious. At the margin, this shift in market expectations is dollar-positive. We think yesterday's dollar weakness is technical in nature, with the rally to resume on the red hot US economic outlook.



Weekly ECB asset purchases will be reported. Due to the holiday, this was delayed from its usual Monday release. The pace has finally started to pick up but this needs to be sustained in order to underscore the ECB’s resolve. Gross purchases should remain close to EUR20 bln. Last week, they were EUR20.4 bln, down from the EUR21.9 bln the previous week that were the highest since early December. Redemptions were relatively small at EUR1.4 bln and so net purchases were EUR19 bln, down from the EUR21 bln the previous week that were the highest since early December. The ECB will also publish the account of its March 10-11 meeting Thursday.

Russia reports March CPI. Headline inflation is expected to rise a tick to 5.8% y/y. If so, it would be the highest since November 2016 and further above the 4% target. Next policy meeting is April 23 and another 25 bp hike to 4.75% is expected after it hiked rates for the first time at the March 19 meeting. Consensus sees 25 bp of tightening in both Q2 and Q3, followed by another 25 bp hike to 5.25% by mid-2022. We see potential for a more aggressive tightening cycle. February trade and Q1 current account data will be reported Friday.



Japan reported February real cash earnings and household spending. Earnings rose 0.2% y/y vs. expectations of a -0.1% y/y drop. January was revised down to -0.6% y/y from -0.1% previously. Still, household spending weakened to -6.6% y/y vs. -5.0% expected and -6.1% in January. This suggests Q1 GDP is likely to come in a bit weaker than expected when it is reported May 18, though the Q2 outlook has been improving as lockdowns end. Bloomberg consensus sees GDP contacting -4.2% q/q in Q1 followed by 5.7% q/q growth in Q2.

Reserve Bank of Australia delivered a dovish hold. All policy settings were left unchanged but the bank said it will decide later this year whether to maintain the April 2024 bond as its YCC target or shift to the next maturity. The RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest,” but a shift in the YCC bond to November 2024 would suggest that a 2025 lift-off may be more likely. Governor Lowe noted that the bank’s first AUD100 bln of longer-dated bond purchases is almost complete and that the second AUD100 bln program will begin next week. He added that “Beyond this, the bank is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation.”

Without a stronger commitment against rising yields, we think markets will eventually test the RBA again. While Aussie yields have stopped rising for now, we think this is due mostly to the stall in US rates. If the upward creep in longer-dated global yields resumes as we expect, the RBA may have to take a stronger stand at the next meeting May 4. Of note, the April 2024 yield has moved back above the 0.10% target to trade around 0.11%, while the November 2024 yield is trading much higher at 0.28%. The good news for the RBA is that the Australian dollar has depreciated 0.5% today and more than 2% since the March 2 meeting. Ahead of the RBA’s financial stability review Friday, Lowe stressed that “Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully. It is important that lending standards are maintained.”

Caixin reported March services and composite PMI readings. Services rose to 54.3 vs. 52.1 expected and 51.5 in February, which pulled the composite up to 53.1 from 51.7 in February. Last week, Caixin reported weaker than expected manufacturing PMI of 50.6 vs. 50.9 in February, while official manufacturing and non-manufacturing PMIs came in stronger than expected at 51.9 and 56.3, respectively. For now, the recovery remains solid as policymakers remain focused on rebalancing and deleveraging the economy.

Reports suggests the PBOC has asked the major banks to curtail lending for the rest of the year. At a March 22 meeting, the central bank told local banks to keep new loans in 2021 at roughly the same level as last year. Data suggest this would result in overall annual loan growth of around 11%, which would be the slowest in more than 15 years. Some foreign banks were reportedly urged to rein in additional lending through so-called window guidance recently. The January-February surge in new loans is clearly causing concerns at the PBOC, and we suspect March will also show a big increase. That data will be reported sometime over the next week.  

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