Dollar Stabilizes as Markets Await Fresh Drivers

February 11, 2021
  • January CPI came in lower than expected; Treasury will sell $27 bln of 30-year bonds; weekly jobless claims data will be watched for signs of improvement; Brazil’s recent data is shifting the narrative to the downside; Peru central is expected to keep rates steady at 0.25%
  • The EU rejected calls from the UK to reset their post-Brexit relationship; the next round of talks regarding services trade is unlikely to go well for the UK; German Chancellor Merkel was reportedly pressured to reopen sooner than she wanted
  • President Biden kicked off the expected pressure on China’s human rights record; US announced sanctions on Myanmar’s military leaders in response to the coup earlier in the month. Malaysia reported Q4 GDP and current account data; Philippine central bank kept rates steady at 2.0%, as expected

The dollar remains under pressure. DXY is flat after being down for the four straight days and remains heave. 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 is trading above $1.38 as it tries to extend its relentless rally to another new multi-year high beyond yesterday’s $1.3865. USD/JPY traded at the lowest level since January 29 near 104.40 yesterday 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.

AMERICAS

January CPI came in lower than expected. Both headline and core were a tick lower than expected at 1.4% y/y. We know from low base effects that the y/y rates for both headline and core CPI will likely spike in March, April, and May. On the other hand, high base effects will likely push the y/y rate back down in June, July, and August. Powell and company have already said that any upcoming spike in inflation would be viewed as transitory. PPI data will be reported next Wednesday, with some clear downside risks to the readings.

The US Treasury will sell $27 bln of 30-year bonds. This will be the final leg of the quarterly refunding. Yesterday, it sold $41 bln of 10-year notes and the metrics were solid if not unspectacular. The bid to cover ratio was 2.37 vs. 2.47 in January, , 60.6% went to indirect bidders (representing foreign demand) vs. 62.2% in January, and the yield was 1.155% vs. 1.164% in January. Metrics from Tuesday’s $58 bln of three-year notes were similarly solid but unspectacular. That said, the market has so far digested another big slug of issuance this week with little disruption.

Low inflation and solid bond auctions have helped push down US yields. The 10-year traded today at a new low for the week near 1.11% before recovering. Let's see how the 30-year auction goes today. Similar to the January auctions, it seems that buyers emerge whenever US rates rise to key levels, i.e. 1.2% for the 10-year and 2.0% for the 30-year. Curve steepening is on hold for now, with the 3-month to 10-year spread at 110 bp vs. the 115 bp peak Monday and the 2- to 10-year spread at 103 bp vs. the 106 peak last Friday.

Weekly jobless claims data will be watched for signs of improvement. Regular initial claims are expected at 760k vs. 779k last week, while regular continuing claims are expected at 4.42 mln vs. 4.59mln the previous week. Last week’s initial claims were the lowest since late November and the continuing claims the lowest since March. Elsewhere, emergency PUA and PEUC continuing claims have resumed falling after an early January spike, which is another supportive sign for the jobs. All in all, the signs point to some modest healing is being seen in the labor market as 2021 gets under way and hopefully that will be reflected in upcoming NFP readings.

Brazil’s recent data is shifting the narrative to the downside, placing the strong hiking expectations under question. Yesterday, December retail sales crashed by -6.1% m/m, far lower than the -0.8% expected, in contrast to the recent upbeat official communication. December services activity will be reported today. We still think odds of a hike at the next meeting March 17 are high (markets are pricing in 30 bp), but it seems far less certain now. In the end, the currency might be the swing variable here. Indeed, the BCB already showed its determination to defend BRL with the recent unscheduled FX swap intervention.

Peru central bank is expected to keep rates steady at 0.25%. CPI rose 2.7% y/y in January, the highest since May 2019 and nearing the top of the 1-3% target range. Still, the economy remains weak and so policymakers are likely to remain accommodative for much of this year. Further stimulus is likely to come from the fiscal side.

EUROPE/MIDDLE EAST/AFRICA

The EU rejected calls from the UK to reset their post-Brexit relationship. Britain wants to delay the implementation of border checks on goods such as supermarkets foods and medicines going into Northern Ireland given ongoing supply disruptions. However, the EU refused and said that the UK’s promises made on Northern Ireland “urgently need to be fully and faithfully implemented.” The issue came to a head with the EU’s bungled handling of the vaccine roll-out and subsequent export controls and so there is plenty of blame to go around.

EU-UK relations remain poor and it’s clear that the next round of talks regarding services trade is unlikely to go well for the UK. EU financial centers are already benefiting at London’s expense, and now the growing ill will is likely to poison the well in future talks. Of note, data show that Amsterdam overtook London as Europe’s largest share trading center in January. Average volume on Dutch bourses quadrupled from December to EUR9.2 bln vs. EUR8.6 bln on UK bourses.

German Chancellor Merkel was reportedly pressured to reopen sooner than she wanted. We think this raises the risks that reopening too soon will lead to another round of lockdowns if mishandled. Reports suggest she wanted to keep everything shut down until mid-March but was met with pushback from states regarding schools and daycares. Those will now be allowed to reopen at the discretion of the states starting as early as February 22. Hairdressers can reopen starting March 1, while non-essential stores can reopen starting March 7 in regions with a seven-day infection of 35 or less for at least three days. Reopening of hotels, restaurants, and other leisure facilities will be decided later.


ASIA

President Biden kicked off the expected pressure on China’s human rights record. He called China’s recent actions in the region “increasingly assertive” and specifically mentioned Hong Kong and Taiwan. Nothing surprising here. All this happened during the first call between Presidents Biden and Xi. We expect the new administration to remain tough on China but with a change in emphasis towards human rights. This is not to say that the commercial side of the conflict will disappear, but it will probably be slower moving and seeking global support.

The US announced sanctions on Myanmar’s military leaders in response to the coup earlier in the month. This would restrict their access to some $1 bln in government funds held in the U.S. Of note, US officials said the move was made “in consultation and in close coordination with our partners and allies in steps that will be taken, pressure that can be made.” This suggests a more coordinated approach to punishing global pariahs than what we saw during the previous administration.

Malaysia reported Q4 GDP and current account data. GDP contracted -0.3% q/q vs. flat expected and 18.2% in Q3, while the y/y rate came in at -3.4% vs. -3.1% expected and a revised -2.6% (was -2.7%) in Q3. For the entire year, GDP contracted -5.6% vs. 4.3% growth in 2019. Bank Negara just kept rates steady at 1.75%, as expected. However, the bank left the door open for further easing by noting that policy going forward “will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.” Ongoing deflation risks as well as widening lockdowns warn of an eventual rate cut this year, perhaps as early as the next meeting March 4. Elsewhere, the current account surplus was MYR19.0 bln vs. MYR20.5 bln expected and MYR26.1 bln in Q3.

Philippine central bank kept rates steady at 2.0%, as expected. January CPI rose 4.2% y/y in January, the highest since January 2019 and above the 2-4% target range for the first time since then. The bank now sees 2021 inflation of 4.0% vs. 3.2% forecast in December. The bank sees inflation returning to the target range in H2 and forecasts 2022 inflation of 2.7% vs. 2.9% previously. While it’s too early to talk about a tightening cycle, it’s clear that the easing cycle is on hold and may have ended altogether.

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