Dollar Fade Continues

February 10, 2021
  • January CPI data will be the US data highlight; Treasury will sell $41 bln of 10-year notes; January budget statement will draw some attention; Brazil central bank pushed back against BRL weakness with an unscheduled intervention in the swap market yesterday
  • France reported weak December IP; Sweden’s Riksbank kept rates steady at 0.0%, as expected
  • Japan January PPI fell -1.6% y/y, as expected; China January CPI surprised to the downside at -0.3% y/y

The dollar continues to fade. DXY is down for the fourth straight day and is trading at the lowest level since January 27. It has retraced over half of this year’s rally and a break below 90.123 would signal a move back to the January low near 89.209. The euro is finding traction above $1.21 while sterling continues its relentless rally to another new multi-year high near $1.3855. USD/JPY traded at the lowest level since January 29 near 104.40 but has since recovered a bit. While we are increasingly confident that the dollar can carve out a bottom in Q1, this week’s price action suggests its recovery won’t be a straight line.


January CPI data will be the US data highlight. Headline inflation is expected to rise a tick to 1.5% y/y, while core is expected to fall a tick to 1.5% y/y. As Powell and others at the Fed have noted, any acceleration in inflation is seen as transitory. Of note, core PCE rose 1.5% y/y in December and has not been above 2% since December 2018. In its most recent economic projections from December, the Fed sees core PCE of 1.8% in 2021, 1.9% in 2022, and 2.0% in 2023. The Fed will update its projections at the March 17 meeting. Fed Chair Powell speaks to the Economic Club of New York today.

The US Treasury will sell $41 bln of 10-year notes. This is s the second leg of $126 bln in total coupon debt to be sold this week. At the last auction in January, the bid to cover ratio was 2.47, 62.2% went to indirect bidders (representing foreign demand), and the yield was 1.164%. Yesterday, Treasury sold $58 bln of three-year notes and the results were solid. The bid to cover ratio fell to 2.39 vs. 2.52 last month, but 52.7% went to indirect bidders vs. 52.2% last month and the yield fell to 0.196% vs. 0.234% last month. Tomorrow is the last leg, where it will sell $27 bln of 30-year bonds.

The January budget statement will draw some attention. A deficit of -$150 bln is expected. If so, the 12-month total would rise to another record high -$3.47 trln. Higher outlays continue to put upside pressure on the deficit and that is only going to get worse as the next round of spending is likely enacted next month. For now, the market has been able to absorb the issuance but this week will provide another big test. December wholesale trade sales and inventories and January real earnings will also be reported today.

The Brazilian central bank pushed back against BRL weakness with an unscheduled intervention in the swap market yesterday. This confirms that the backstop is still there for when the currency moves too far out of line with the broader trends. Separately, the central bank autonomy bill is being debated in Congress now. Passing the bill will serve two purposes. First, it will help consolidate institutional confidence and second, it will show that the new Congress’ composition and recently elected speaker are able to move on the agenda. Contrary to our call, BRL is struggling to gain traction even as the reflation trade heats up gain. Over the last 6 months, the currency is down over 1%, vastly underperforming the broad EM index, up 4.4%.


France reported weak December IP. It was expected to rise 0.4% m/m but instead fell double that at -0.8%. November was revised to -0.7% from -0.9% previously. Manufacturing was the culprit, falling -1.7% m/m vs. -0.3% expected. Eurozone IP will be reported next Monday and is expected to fall -0.5% m/m vs. a 2.5% gain in November. However, the risks are tilted to the downside and given the lockdowns since, we know that January data will be even worse.

Sweden’s Riksbank kept rates steady at 0.0%, as expected. The bank just expanded its QE by SEK200 bln to a total of SEK700 bln at its last meeting in November and so it was too soon to expect another move. It said today that “The Executive Board’s current assessment is that the envelope for asset purchases will be fully utilized by the end of 2021 and that the size of the holdings will be maintained on this level at least during 2022.” Some took this as a hawkish sign but we think it’s very possible that it boosts QE again this year. The Riksbank noted that it’s “entirely possible” for the repo rate to be cut if needed, but we believe it does not want to go negative again and will instead rely on further QE if more stimulus is needed. The zero rate path was extended another quarter to Q1 2024, while growth and inflation forecasts were tweaked in both directions. Of note, the forecasts now see inflation at the 2% target in Q1 2024. Governor Ingves stressed that the risk is to withdraw support too early, not too late, and saw no major problem if inflation overshoots for some time.


Japan January PPI fell -1.6% y/y, as expected. This was an improvement from the -2.0% reading in December, and is the best since September. For now, the Bank of Japan is on hold. Markets await its policy review at the March meeting and some officials are pushing back against the rumored tweaks to its ETF purchases. New board member Nakamura said those purchases have been effective in fighting a deflationary mindset, adding “It continues to be a necessary tool.” However, Nakamura said that the bank will examine how its asset purchases impact the functioning of markets. We believe that if the economy continues to suffer and Prime Minister Suga’s popularity continues to fall, we fully expect another round if fiscal stimulus by mid-year.

China January CPI surprised to the downside at -0.3% y/y vs. expectations for flat. Base effects were partially to blame, offsetting higher food prices (+1.6% y/y) resulting from the poor weather condition. But food inflation is still nowhere near the spike from the swine flu. Services reversed the December increase and fell 0.7% in January. Of note, core inflation fell below zero for the first time since 2010 to -0.3% y/y. Elsewhere, PPI rose 0.3% y/y, as expected, and was due largely to rising commodity prices. This was the first positive reading since last January. After today, markets will close for the Lunar New Year holiday until February 18.  

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