Dollar’s Rise Slows

February 03, 2021
  • The GameStop saga is drawing to a close but US officials are not letting their guard down; no concrete regulatory action is expected to emerge near-term as markets are on a “normalizing” path; we get some final clues for Friday’s jobs data; efforts to pass the next relief bill continue; US Treasury will release details of its quarterly refunding
  • Mario Draghi may be Italy’s new Prime Minister; eurozone reported final January services and composite PMIs and January CPI; protesters in Russia returned to the streets after opposition leader Navalny was handed a near 3-year prison sentence; Turkey reported January CPI; Poland is expected to keep rates steady at 0.1%
  • Japan reported final services and composite PMIs; RBA Governor Lowe delivered a dovish message; local rates in China have started to normalize; Thailand kept rates steady at 0.5%, as expected

The dollar bounce has slowed but may not be over. DXY is flat today after three straight up days. For now, it seems to be a battle between growth/vaccine differentials (supporting the dollar) versus risk appetite/diversification (against the dollar). After declining 13% peak to trough, DXY is now up 2% from the lows in early January and needs to break above the 91.428 area to extend its gains. The euro is trading at the lowest level since December 1 near $1.2030 and is testing the key $1.2010 level. A break below would set up a test of the November 23 low near $1.18.  Sterling is holding above $1.36, while USD/JPY remains above 105 but is struggling to make further headway towards our target of the November high near 105.70.


The GameStop saga is drawing to a close but US officials are not letting their guard down. Treasury Secretary Yellen has called a meeting with the SEC, the Fed, and the CFTC to discuss financial stability risks. According to an official statement, “Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets.”

No concrete regulatory action is expected to emerge near-term as markets are on a “normalizing” path. The Reddit-inspired rally continued to unwind yesterday with GameStop losing 60% of its value while silver steadied. Equites across Asia Pacific and Europe rose after Amazon and Alphabet earnings, while US futures are pointing to a higher open. Indeed, equity market implied volatility measures (|VIX and V2X for Europe), are already declining fast. That said, the recent volatility is clearly on Yellen’s and Powell’s radar screens. Kashkari, Bullard, Harker, Mester, and Evans speak today.

We get some final clues for Friday’s jobs data. ADP private sector jobs data is expected at 50k vs. -123k in December.  Bloomberg consensus for NFP started out at 100k, fell to 75k, fell again to 50k, but now stands at 70k. The unemployment rate is seen remaining steady at 6.7%.  Also, ISM services PMI is expected at 56.7 vs. a revised 57.7 (was 57.2) in December.  The employment component will be closely watched for signs of weakness in the labor market.  Earlier this week, the ISM manufacturing PMI employment component rose to 52.6 from a revised 51.7 (was 51.5) in December.  This was the highest reading since June 2019.  Of course, the services sector is much more important for the US but for now, the economy is starting the year off on pretty firm footing.

Efforts to pass the next relief bill continue.  Democratic Senator Manchin of West Virginia said he will vote in favor of his party’s $1.9 trln relief plan. Manchin had expressed doubts as to whether $1.9 trln was needed but he now seems to have fallen into line with his colleagues. Senate Democrats have started the process of budget reconciliation, which would allow much of Biden’s package to pass by a simple majority rather than the usual 60 votes. That process will continue throughout the week.

The US Treasury will release details of its quarterly refunding.  The majority of primary dealers see no increase in coupon-bearing auctions over the next three months, focusing on the huge cash balance that Treasury is holding right now. If so, this would be the first time issuance didn’t increase since last May. Of note, Treasury announced Monday that it plans to borrow $274 bln in Q1, down from the November estimate of $1.127 trln and due to a higher cash balance at the end of January.

Dealers will be watching for any signs that new Treasury Secretary Yellen is considering changing its debt issuance strategy.  During her confirmation hearing, she said Treasury would study issuance of 50-year bonds but this week seems too soon to make any such decision. We think a relief bill of around $1 trln may be a sweet spot for the US.  That is, it will provide significant stimulus to the economy without overwhelming the market with an excessive supply of bond issuance.


Mario Draghi may be Italy’s new Prime Minister, a very positive development in our view. However, this is far from an assured outcome. The former ECB head will meet President Mattarella after former Prime Minister Conte failed to rebuild a working coalition. Our initial reaction is to view this as great news for Italy and the region, but it’s hard to form a complete picture until we see what the coalition will look like, if it happens at all. We may yet end up with new elections, though this is still seen as tail risk as Renzi does not want this. If he succeeds, Draghi will likely help deepen integration within Europe and underpin confidence in the Italy’s economic policy. Italian spreads have narrowed sharply on the news. Yet Italy faces huge fundamental challenges ranging from the banking system to debt sustainability.

Eurozone reported final January services and composite PMI readings.  Headline services rose to 45.4 from 45.0 preliminary, pushing the composite up to 47.8 from 47.5 preliminary. French composite improved to 47.7 from 47.0 preliminary, while German composite was steady at 50.8. Of note, Italy’s composite jumped to 47.2 from 43.0 in December, while Spain’s plunged to 43.2 from 48.7 in December as their services readings moved in opposite directions. Elsewhere, UK final January services PMI rose to 39.5 from 38.8 preliminary, pushing the composite up to 41.2 from 40.6 preliminary.

Eurozone also reported January CPI.  Headline inflation came in at 0.9% y/y vs. 0.6% expected and -0.3% in December, while core came in at 1.4% y/y vs. 0.9% expected and 0.2% in December.  Last week, Germany and Spain reported higher than expected inflation and France did the same yesterday and so there were clear upside risks to the headline eurozone reading here.   That said, this is widely seen as a transitory rise. Why else would so many ECB policymakers be fretting about the strong euro? One major factor came from Germany, where a temporary reduction in sales taxes was phased out at the start of this year. In addition, a 3.8% jump in energy costs as well as higher food prices flattered the readings.

Protesters in Russia returned to the streets after opposition leader Navalny was handed a near 3-year prison sentence. The court found that Navalny violated his probation rules from his previous fraud sentence. Internationally, Western leaders were quick in condemning the actions. Investors should be prepared for increasing risk of sanctions. Also, as discussed in our recent report (here), the odds of US-EU-UK cooperation on the matter is now much higher. EC President Ursula von der Leyen, for example, stated that she condemns the sentencing in the “strongest possible terms.” But it’s still far too early to say what manner of sanctions will be discussed and how disruptive they can be. Still, we reiterate our view that Russian assets are likely to underperform others in EM, and Brazil offers a better strategic risk-reward for playing the reflation trade for now.

Turkey reported January CPI.  Headline inflation came in at 14.97% y/y vs. 14.70 expected and 14.60% in December.  It is the highest since August 2019 and further above the 3-7% target range.  PPI inflation accelerated a full percentage point to 26.16% y/y rather than slowing to 24.60% and points to a further rise in CPI ahead. The bank kept rates steady at 17.0% in January after its 200 bp hike in December.  Next policy meeting is February 18 and chances of a hike have risen significantly. The lira will likely be the deciding factor then.

National Bank of Poland is expected to keep rates steady at 0.1%.  CPI rose 2.4% y/y in December, the lowest since May 2019 and in the bottom half of the 2.5-4.5% target range.  No wonder the central bank has been sounding so dovish lately.  Governor Glapinski has hinted at further rate cuts but there isn’t much room and we doubt it will go negative.  Instead, we expect the bank to continue its efforts to weaken the zloty.  Central bank minutes will be released Friday. Reports suggest Glapinski may not serve a second six-year term when his current one ends in March 2022. Ruling Law and Justice leader Kaczynski is reportedly unhappy with Glapinski’s performance and is mulling replacing him with current Prime Minister Morawiecki. Stay tuned.


Japan reported final services and composite PMIs. Services rose to 46.1 from 45.7 previously, pushing the composite up to 47.1 from 46.7 preliminary. Despite the modest improvement, the composite reading is the lowest since September and reflects ongoing difficulties in controlling the virus. For now, the Bank of Japan is on hold.  Deputy Governor Wakatabe said “I would like to emphasize that the bank does not intend to tighten monetary easing.” Rather, he said that in conducting its ongoing policy review, the bank is trying to make easing “more effective and sustainable.” The bank is expected to release the results of its policy review at the March 19 meeting.  There has been chatter about letting the 10-yrear yield trade within a wider range around the 0% target. Yet we see little benefit of doing this. And with the yen finally weakening, why rock the boat?

RBA Governor Lowe delivered a dovish message. In a speech, he said “The bond-purchase program has helped to lower interest rates and has meant that the Australian dollar is lower than it otherwise would have been.” That said, he stressed that interest rates won’t rise until 2024 or later given the outlook for jobs and inflation. He added that “As housing prices rise again, we will be monitoring lending standards closely. We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment.” This came just after data showed building approvals surged 10.9% m/m in December, with private sector approvals up 15.8% m/m. The RBA will release its Statement on Monetary Policy Friday and is expected to reinforce the bank’s dovish stance. Elsewhere, Australia reported final services and composite PMIs. Services fell to 55.6 from 55.8 previously, pushing the composite down to 55.9 from 56.0 preliminary.

As expected, local rates in China have started to normalize. As we previously noted, the short – and often seasonal – liquidity crunches happen from time to time, especially ahead of the Lunar New Year holiday. In fact, the PBOC drained the equivalent of $12 bln from the system today. We still think the bank’s bias is towards gradual tightening, with an eye on speculative excesses in the equity and real estate markets.

Bank of Thailand kept rates steady at 0.5%, as expected.  Assistant Governor Titanun said the bank was preserving its policy space for the proper time but remains prepared to use additional monetary tools if needed. The bank is also assessing the need for new measures in the FX market, presumably to help limit baht appreciation. January CPI will be reported Friday with headline expected at -0.31% y/y vs. -0.27% in December.  If so, inflation would remain well below the 1-4% target range and should allow the bank to keep policy accommodative this year.  Titanun said “The economy continues to face downside risks going forward and needs support from a low interest rate.”

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