Dollar Remains Under Pressure on Lower US Yields

April 07, 2021
  • Despite string US data, US yields continue to edge lower; FOMC minutes will be released; Canada reports March Ivey PMI and February trade
  • Weekly ECB asset purchases will be reported; Governing Council member Knot said that the ECB could start tapering PEPP in Q3; the eurozone reported final March services and composite PMI readings; concerns about the UK vaccination program are growing; Poland is expected to keep rates steady at 0.10%
  • Tokyo may return to stricter measures to limit the recent rise in virus numbers; India kept rates on hold but announced a new QE program; BOT minutes were downbeat; China FX reserves fell for the third consecutive month

The dollar remains under modest pressure. DXY is down for the third straight day and for five of the past six to trade at the lowest level since March 23. Despite this setback, we believe the fundamental story remains positive for the dollar. However, a break below the 92.117 area would suggest a deeper correction to the March 18 low near 91.30. The euro is leading this move and trading near $1.19. A clean break of the $1.1890 area (200-day moving average) would set up a test of the March 18 high near $1.1990. Sterling is underperforming lately (see below) but has recovered a bit on broad dollar weakness. The $1.3765 level is key to watch as a break below would set up a test of the March 25 low near $1.3670. The rise in USD/JPY has stalled after the failed test of the 111 level. The 109.40 level is key to watch as a break below would set up a test of the March 23 low near 108.40.



Despite strong US data, US yields continue to edge lower. After the 10-year yield hit an intraday high near 1.77% early last week, it has since eased to around 1.65% currently. Given the Fed’s clear signal that it’s not worried about rising yields as the economy gains momentum, we believe this drop is temporary, with the 10-year yield still on track to test the December 2019 high near 1.95%. The 3-month to 10-year curve is at 164 bp, below the cycle peak near 1.73% from the end of March. Here too, we think this modest flattening is temporary, with the curve still on track to test the December 2016 high near 210 bp. Markets have gotten too complacent about US yields and inflation in recent days, especially in light of the extremely strong US data.

FOMC minutes will be released. At the March 17 meeting, Chair Powell stuck with the dovish party line. That is, the Fed is nowhere close to removing accommodation as the expected rise in inflation is seen as transitory. When asked about rising US yields, Powell said financial conditions remain highly accommodative and that this is very important. He added the he would be concerned by disorderly market conditions. Basically, he signaled that the Fed is not concerned with the current level of yields but is well aware that a pace that becomes disorderly may need stronger action. Minutes may shed light on when this might happen. Elsewhere, Evans, Kaplan, and Barkin also speak today. Data is limited today, with only February trade (-$70.5 bln expected) and consumer credit ($2.8 bln expected) to be reported. 

Canada reports March Ivey PMI and February trade. The main event is March jobs data Friday. A 90kgain is expected vs. 259.2k in February, while the unemployment rate is expected to fall a couple of ticks to 8.0%. Like the US, Canada saw a loss of momentum in the economy going into year-end but is seeing a strong recovery in Q1. Yet the vaccine rollout in Canada has lagged even the laggards in Europe and so maintaining momentum will be hindered somewhat. We expect fiscal policy to carry the burden of stimulus in 2021. Ahead of the jobs data,



French Finance Minister Le Maire is deeply concerned about continued delays in the EU recovery fund. He said the EUR750 bln plan is “not on the right track” and that he’s “deeply concerned” at the extremely slow implementation of the initiative that was first agreed to last July. He noted that “We are in April 2021, and once again I have not seen any single penny, and the decisions on the own resources have not been ratified by the 27 member states.” Contrast this to the US, where the fiscal response has been quick and aggressive, with more to come. The eurozone economic outlook remains weak in comparison and so we believe that recent euro gains are temporary.

Weekly ECB asset purchases will be reported. Due to the Easter holidays, 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.

Governing Council member Knot said that the ECB could start tapering PEPP in Q3. He added that this would keep the bank on track to end purchases as planned in March 2022, though Knot said this path is likely only if the economy develops according to the baseline forecasts. While his comments may be feeding into euro gains, Knot is one of the hawks at the ECB and his view is not equally shared. Indeed, the ECB will publish the account of its March 10-11 meeting tomorrow and should show that the bank remains split about the need for stimulus. We know that the decision to speed up PEPP purchases was made by consensus, meaning there were many naysayers.

The eurozone reported final March services and composite PMI readings. Headline services rose to 49.6 from 48.8 preliminary, pulling the headline composite up to 53.2 from 52.5 preliminary. German composite rose to 57.3 from 56.8 preliminary, while French composite rose to 50.0 from 49.5 preliminary. Of note, Spain and Italy both improved from February, with their composite PMIS rising to 50.1 and 51.9, respectively. With France going back into lockdown and Italy and Germany extending partial lockdowns even as vaccines lag, the weak eurozone outlook is likely to carry over into Q2.

Concerns about the UK vaccination program are growing. Officials are admitting that the pace of vaccinations will slow in April due to supply, even as questions about the AstraZeneca vaccine mount. The UK vaccination program has been heavily reliant on the AstraZeneca vaccine, which has been dogged by questions about possible side effects. An extended slowdown in vaccinations may derail the government’s plan to reopen the economy fully by late June and to have all adults vaccinated by the end of July. In a possible offset, the UK began using the Moderna vaccine today after ordering 17 mln doses (enough for 8.5 mln people). Sterling had been outperforming as the vaccine rollout was amongst the best worldwide, but recent developments have led to some underperformance. Elsewhere, the UK reported final March services and composite PMI readings. Headline services fell to 56.3 from 56.8 preliminary, pulling the headline composite down slightly to 56.4 from 56.6 preliminary. Construction PMI will be reported tomorrow.

National Bank of Poland is expected to keep rates steady at 0.10%. Minutes for the March 3 meeting will be released Friday. At that meeting, the bank kept rate steady but threatened to intervene in the FX market again. It also raised its macro forecasts for this year. Growth is seen between 2.6-5.3% vs. 0.8-4.5% previously, while inflation is seen between 2.7-3.6% vs. 1.8-3.2% previously. With the economy suffering from the pandemic, the bank is likely to maintain accommodative policy well into 2022. With rates at rock bottom and QE continuing, a weaker zloty will likely be the main policy lever if more stimulus is needed.



Tokyo may return to stricter measures to limit the recent rise in virus numbers. Daily infections hit 555, the most since early February. Tokyo Governor Koike said she’d decide on whether to formally requesting the tighter measures after consulting with experts. Tokyo follows Osaka in experiencing rising cases. Of note, Osaka lifted its state of emergency at the end of February, while Tokyo waited until mid-March to do so. As such, the risk is very real that Tokyo will see an even greater spike along the lines of Osaka’s. While Japan’s overall numbers are a fraction of those seen in other countries, the pace of vaccine roll-out has lagged and so there is potential for another poor quarter of economic performance if the situation worsens. Also, the surges comes just around three months before the planned start of the Summer Olympics. Osaka Governor Yoshimura said he would cancel the Olympic Torch Relay in his prefecture, scheduled to be held April 13-14.

The Reserve Bank of India kept rates on hold but announced a new QE program. The bank will buy some INR1 trln ($13.5 bln) of government bonds in Q2 to ensure a sustainable recovery. India remains one of the worst hit countries from the pandemic, and it’s getting worse. The policy rate was unchanged at 4.0%, as expected, and inflation around 5% is still within the RBI’s range 2-6% but above the midpoint. India’s 10-year bonds fell 11 bp to just over 6% and the rupee is down 0.8% against the dollar, by far the worst underperformer in the EM space. Consensus sees steady rates through 2021, with odds of a hike rising around mid-2022 and beyond. We are not convinced the easing cycle is over, especially after today’s QE move.

Bank of Thailand minutes were downbeat. Officials lowered the growth forecast to 3% for 2021, warning more stimulus would be needed if tourism remains depressed. The bank warned that the economy could underperform baseline GDP projections. Tourism will remain a challenge with only 295k vaccine doses administered in a country of almost 70 mln. Foreign capital flows continue to trickle out of Thai equities, $1 bln year to date, which dwarfs the net $248 mln inflows to debt securities.

China FX reserves fell for the third consecutive month, but was largely driven by the effects of the stronger dollar. The statement released by SAFE also noted the impact of lower bond prices and stock markets. The March figure came in at $3.17 trln, down about 1% from February and close to expectations.  

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