Dollar Firm Ahead of BOE Decision

February 04, 2021
  • We got the last major clues for Friday jobs data yesterday and they’re good; weekly jobless claims data will be reported; Treasury released details of its quarterly refunding plans yesterday; the US curve steepened to new highs
  • BOE is expected to keep policy steady; Germany announced a €9 bln stimulus package that’s equal to 0.2% of GDP eurozone reported December retail sales; Czech National Bank is expected to keep rates steady at 0.25% 
  • Australia December trade data showed surging iron ore shipments

The dollar continues to power ahead.  DXY is trading at the highest level since December 2 and a clean break above 91.428 would set up a test of the November 23 high near 92.80. The euro is trading below the $1.20 level for the first time since December 1. With today’s break below $1.2010, it is already on track to test its November 23 low near $1.18.  However, a break below $1.1975 would signal deeper losses to $1.1745. Sterling has broken below $1.36 for the first time since January 19, while USD/JPY is trading at the highest level since November 12 and is nearing that month’s high near 105.70. After that is the October high near 106.10, though the 200-day moving average near 105.60 may slow this pair’s upward march.


We got the last major clues for Friday jobs data yesterday and they’re good. ADP reported private sector job gains of 174k, well above consensus 70k. December was revised to -78k from -123k previously. Elsewhere, the employment component for ISM services PMI jumped to 55.2 from 48.7, the highest since last February. The headline ISM services PMI unexpectedly rose to 58.7, the highest since February 2019. The US economy is clearly holding up better than expected and that will only get better as the vaccine roll-out continues and the virus numbers fall. Bloomberg consensus for NFPs is back up to 100k from a low of 50k. However, the whisper number is probably something closer to 200k after yesterday’s data. US growth in Q1 and Q2 should easily outstrip that of the eurozone.

Weekly jobless claims data will be reported.  Regular initial claims are expected at 830k vs. 847k last week, while regular continuing claims are expected at 4.70 mln vs. 4.77 mln the previous week.  Of note, weekly claims data for the BLS survey week containing the 12th of the month were mixed.  Regular and PUA initial claims totaled 1.422 mln (unadjusted), the highest since  mid-September.  On the other hand, regular continuing clams fell to 5.21 mln (unadjusted), the lowest since mid-March.  PUA and PEUC continuing claims for the survey week will be reported today; together, they jumped by 2.5 mln (unadjusted) the prior week. Kaplan and Daly speak. January challenger job cuts, Q4 unit labor costs and productivity, and December factory orders (0.7% m/m expected) will also be reported.

The US Treasury released details of its quarterly refunding plans yesterday.  It plans to sell $126 bln in total coupon debt next week. $58 bln of three-year notes will be sold Tuesday, $4 bln more than the November refunding. $41 bln of 10-year notes will be sold Wednesday, the same as November. Lastly, $27 bln of 30-year bonds will be sold Thursday, the same as November. Primary deals were expecting no change given the Treasury’s huge cash balance of $1.6 trln currently. The last time the market had to absorb a bug slug of issuance was the large reopening during the week of January 11. Then, $58 bln of 3-year notes, $38 bln of 10-year notes, and $24 bln of 30-year bonds were easily absorbed by the market, with a large chunk going to indirect bidders representing foreign demand.

The US curve has steepened to new highs. Our favored metric (3-month to 10-year) rose to 110 bp, the highest since last March and nearing that month’s peak near 120 bp. The 2- to 10-year spread has moved above the 100 bp level vs. 80 bp at the start of the year and 0 bp in August 2019, and at 103 bp is the highest since May 2017. The steepening has not gotten much attention given all the equity market volatility in recent days. That said, the pace of steepening has so far not been disruptive. And, it would appear that the steepening is due to the “right” reasons (improved US economic outlook) than ”wrong” (excessive debt issuance). In comparison, the steepening in the US has move way ahead of that in the EU, Japan, and the UK, and is only comparable to Australia. This supports our view that growth differentials (and inflation expectations) are starting to play an increasingly larger role in asset prices as investors become more confident that the vaccine-led normalization is within sight.


Bank of England is expected to keep policy steady.  The bank is set to release a view of how negative rates might be implements, we continue to see that as highly unlikely.  Indeed, market pricing of negative rates has ebbed recently due to the improved economic outlook from the UK’s successful vaccine roll out so far. The bank may hint at further action in the future and we believe another increase in asset purchases is likely later this year, probably a  month or two after Chancellor Sunak’s March budget statement as he will give the BOE an indication of how much support will be needed. Updated forecasts will be contained in its Monetary Policy Report. Near-term forecasts will likely be downgraded due to the lockdowns now in effect, while longer-term ones may be upgraded due to the vaccination program.

The German government announced a €9 bln stimulus package that’s equal to 0.2% of GDP. The increased assistance comes through a family-benefit bonus (€150 per child, extending the lower sales tax for restaurants, and allowing larger loss write-off limits for companies. Germany, and the EU as a whole, continues to lag the vaccine rollout, especially when compared to the UK and the US. Finance Minister Scholz said these measures can be financed from funds already set aside in the federal budget. He demurred on the possibility that the government will have to ask parliament for permission to suspend constitutional rules limiting new borrowing for a third straight year in 2022. Given how badly Germany is lagging in the vaccine roll out, we suspect the answer will eventually be yes.


Eurozone reported December retail sales. Sales rose 2.0% m/m vs. 2.8% expected and a revised -5.7% (was -6.1%) in November.  France and Spain reported stronger than expected sales data last week but Germany delivered a big downside miss this week that was a clear offset. Despite a solid finish to last year, the eurozone economy will clearly sputter in early 2021 and is likely to return to form and underperform the US.

Czech National Bank is expected to keep rates steady at 0.25%.  Governor Rusnok surprised markets last week by saying as many as two hikes were possible this year.  He did add that “We will tread very cautiously to make sure we don’t undercut the fragile economic recovery by acting too early or tightening monetary conditions too fast.”  Forward guidance today will be very important. We remain skeptical as the economy remains weak.  December retail sales will be reported Friday and are expected to fall -1.5% y/y vs. -9.2% in November.


Australia December trade data showed surging iron ore shipments. Exports rose 3% m/m vs. 6% expected and 3% in November, while imports fell -2% m/m, right at consensus and down from a revised 9% (was 10%) in November. Yet some of the details were bullish. AUD jumped to a 0.7648 session high and is outperforming today after data showed the nations iron ore exports are at record highs. These exports jumped 21.1% m/m to a record value equivalent to about $9.5 bln. Iron ore prices also received a boost from production disappointment by Brazil’s miner Vale. Australia’s coal exports also increased substantially by 26% m/m, despite tensions with China over trade. Indeed, as we have written before, China has left its major imports from Australia untouched by tariffs.

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