Dollar Remains Under Pressure as North America Returns From Holiday

February 16, 2021
  • With the impeachment trial over, Congress turns its attention back to the stimulus package; the US curve continues to steepen to new highs; January retail sales data tomorrow will be key for the dollar’s near-term outlook; Fed manufacturing surveys for February will start to roll out
  • Germany ZEW survey came in better than expected; Mario Draghi was sworn in as Prime Minister of Italy over the weekend; Israel reported strong Q4 GDP
  • Governor Kuroda said that due to the pandemic, the BOJ is unlikely to meet its 2% inflation target in 2023; Japan Q4 GDP came in stronger than expected; RBA minutes were released; reports suggest China is looking to restrict rare earth supply to critical US industries; Singapore released its 2021 budget statement; oil rallied to 13-month highs as blackouts continued across Texas and the US South

The global vaccine rollout continues to underpin risk sentiment and keep the dollar on its back foot. The Nikkei jumped over 1% and led APAC equities higher, though some Asian markets remain closed for the holiday. Meanwhile, volatility remains extremely low across major assets. The VIX and V2X are just over 20, compared to a 1-year average of about 30. FX G7 vol is near 6%, rapidly approaching the pre-pandemic lows of around 5%. US Treasury volatility has remained remarkably stable despite yield gridding higher in the back end.

The dollar remains under pressure at its comes off its worst week since mid-December. The dollar was on tear for much of January and early February but has softened after the weak jobs data February 5. DXY peaked that day and has since fallen over1.5% and retraced nearly two thirds of this year’s rally. It is testing the 90.123 area and a break below would set up a test of the January low near 89.209. The euro is nearing $1.22, while sterling’s relentless rally has taken it to a new multi-year high near $1.3950 today. USD/JPY has recovered to trade above 105 again and is on track to test this month’s cycle high near 105.75. While we are increasingly confident that the dollar can carve out a bottom in Q1, this past week’s volatile price action suggests its recovery won’t be a straight line.


With the impeachment trial over, Congress turns its attention back to the stimulus package. It’s clear that the $15 per hour minimum wage will be cut from the proposal and any changes made in the Senate mean that it must go back to the House for another vote. Neither house of Congress will be in Washington this week and so the timeline is going to be very tight if a package is to be passed before some provisions from the December package expire in mid-March. Some liberties will be taken, with reports suggesting that Senate Majority Leader Schumer may bypass Senate Finance Committee approval for parts of the bill.

The US curve continues to steepen to new highs. Our favored metric (3-month to 10-year) has risen to 122 bp, past last March’s peak near 120 bp and on the way to testing the February 2018 high near 137 bp. The 2- to 10-year spread has risen to 114 bp vs. 80 bp at the start of this year and 0 bp in August 2019, the highest since March 2017 and nearing the December 2016 high near 134 bp. The steepening has still not been disruptive as equity markets power higher and spread product continue to narrow. It would appear that the steepening is due to the “right” reasons (improved US economic outlook) than ”wrong” (excessive debt issuance).

January retail sales data tomorrow will be key for the dollar’s near-term outlook. Signs of life in the US economy would go a long way for the dollar right now. The greenback has been trading on its back foot ever since the weak January jobs number. If retail sales can bounce back that month despite the poor labor market, the dollar outlook could improve. Headline sales are expected to rise 1.0% m/m vs. -0.7% in December, while sales ex-autos are expected to rise 0.9% m/m vs. -1.4% in December. The so-called control group used for GDP calculations is expected to rise 0.9% m/m vs. -1.9% in December.

Fed manufacturing surveys for February will start to roll out. Empire survey is expected at 6.0 vs. and 3.5 in January. Philly Fed survey is out Thursday and expected at 20.0 vs. 26.5 in January. Markit reports preliminary February PMI readings Friday, with manufacturing expected at 58.5 vs. 59.2 in January and services expected at 58.0 vs. 58.3 in January. These are the first snapshots for February and will help set the tone for other data to come. Bowman, George, Kaplan, and Daly speak while December TIC data will be reported. Elsewhere, Canada reports January existing home sales.


Germany ZEW survey came in better than expected. The forward-looking expectations component jumped to 71.2 in February vs. 59.5 expected and 61.8 in January. However, the current situation component remained depressed at -67.2, around what was expected and little changed from January’s -66.4. For the wider eurozone, the February ZEW showed expectations improving to 69.6 from 58.3 in January, the highest since September. Of note, eurozone December IP was reported Monday, with IP down -1.6% m/m, double the expected -0.8%. The November gain was revised up a tick to 2.6%.

Mario Draghi was sworn in as Prime Minister of Italy over the weekend. More importantly, he nominated his cabinet and the key post is Bank of Italy’s Daniele Franco as Finance Minister. The rest is a mix of technocrats and politicians across the spectrum spanning the center-left Democratic Party, the anti-migrant League, and Silvio Berlusconi’s Forza Italia. Draghi also a new Ministry for Ecological Transition to shore up support on the left. This broad coalition is needed to ensure stability in the government, which faces votes of confidence in both houses of Parliament, likely next week.

Israel reported strong Q4 GDP. It was expected to contract -3.7% annualized but instead grew 6.3%. Growth in Q3 was revised up to 41.5% from 39.7% previously. While the economy suffered greatly in H1 of last year, it rebounded in H2 and that is likely to carry over into 2021 as its world-leading vaccine rollout continues. January CPI was reported Monday and headline came in at -0.4% y/y vs. -0.6% expected and -0.7% in December. This is the tenth straight month of deflation and well below the 1-3% target range. The central bank meets Friday. With the economy rebounding smartly, it is expected to keep rates steady at 0.10%. However, it will likely underscore its commitment to weakening the shekel as it main tool to supporting the recovery.


Governor Kuroda said that due to the pandemic, the BOJ is unlikely to meet its 2% inflation target in 2023. Updated macro forecasts will be released at the April 26/27 meeting and will include FY23 for the first time. It sees inflation at 0.7% for FY22 and so it’s pretty clear from Kuroda’s comments that the forecast for FY23 will fall short as well. That implies that policy will remain unchanged until at least FY24. Deflationary pressures remain persistent. Next Bank of Japan policy meeting is March 18-19 and no change is expected then. While monetary policy is on hold, we fully expect another round of fiscal stimulus later this year.

Japan Q4 GDP came in stronger than expected. Growth was 3.0% q/q vs. 2.4% expected and 5.3% in Q3. Annualized, growth was 12.7% vs. 10.1% expected and a revised 22.7% (was 22.9%) in Q3. Growth was broad based, with private consumption up 2.2% q/q and business spending up 4.5% q/q. Of note, net exports contributed 1 percentage point to growth while inventories subtracted -0.4 percentage points. The economy is likely to suffer from the current lockdowns and GDP is expected to contract in Q1.

RBA minutes were released. Recall that the bank delivered a dovish surprise at this month’s meeting by extending its asset purchases beyond mid-April with an AUD100 bln increase. Governor Lowe also said then that he didn’t expect a rate hike until 2024 at the earliest. Minutes reflect this, as the bank expects “very significant” monetary support will be needed for some time as it will take years to meet its inflation and unemployment goals. The RBA noted other major central banks were extending QE and that there was widespread market expectation that its program would also be extended in some form. The RBA said that if it had had allowed QE to end in mid-April, AUD would likely have risen. For now, the RBA is clearly on hold with risks of further QE as risks lie ahead. Next RBA policy meeting is March 2 and no change is expected then.

In a new sign of US-China confrontation, reports suggest China is looking to restrict rare earth supply to critical US industries. According to the Financial Times, officials are exploring the impact of a supply shock on industries in the US, including fighter jets and mobile phones. The article didn’t cite the sources, but it’s consistent with new guidelines for the sector and its exports. China controls most of the world’s mined output, with an even greater share of the processing industry. Indeed, China supplies 80% of rare earth imports into the US and Beijing last considered export curbs back in 2019 during the height of the trade war. Stay tuned.

Singapore released its 2021 budget statement. The government announced a fiscal package that includes some $8.3 bln in new spending. The new funds will come from its reserves and will be allocated to households and businesses struggling with the impact of the pandemic. But it is also trimming the deficit to -2.2% of GDP for the next fiscal year, about half the size of what was expected and down from -13.9% for the current fiscal year. The government is also planning to increase the GST sometime between 2022-2025 but “sooner rather than later.” For now, the economy continues to benefit from the regional recovery and fiscal stimulus remains in place. As such, the MAS is likely to keep policy unchanged at its policy meeting in April.


Oil rallied to 13-month highs as blackouts continued across Texas and the US South. In addition, natural gas prices soared as physical delivery came at a premium in artic conditions. Several refineries had to shutter causing power outages, leading President Biden to declare an emergency in Texas. WTI is trading just under $60 per barrel, up 23% this year, while natural gas is up 21%. While prices are likely to normalize after the emergency, recent developments will certainly add to the inflation chatter in global financial markets.

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