Dollar Rally Takes a Breather

February 18, 2021
  • January retail sales data may have been a game-changer; really, data this week have been pretty much everything a dollar bull could ask for; Fed manufacturing surveys for February will continue to roll out; weekly jobless claims data will be watched closely; FOMC minutes are worth discussing
  • BOE Deputy Governor Ramsden said there is room for more QE if needed; Turkey kept rates steady at 17%, as expected
  • Australia reported solid January jobs data; Chinese markets have reopened from holiday with modest price action; Indonesia cut rates by 25 bp to 3.50% as expected; Brent oil rose over $65 per barrel for the first time since last January

Implied volatility in the US fixed income market seems to have woken up from its post-election slumber. The MOVE index has reverted to its 1-year average of around 60, compared to the mid-40s level seen for most of the period following the US elections. In contrast, implied volatility for the equity markets (VIX) has remain low and G7 FX implied vol has ticked higher only modestly in the last few days.

The dollar is taking a breather. DXY is down today for the first time since February 10 after failing yesterday to break above 91.035, which would have set up a test of this month’s high near 91.602. The euro found support around the $1.2035 area but remains heavy, while sterling has recovered much more sharply and is testing its multi-year cycle high near $1.3950 already. As a result, EUR/GBP made a new cycle low today near .8650. USD/JPY is trading back below 106 after failing to make a clean break of the October high near 106.10. We are increasingly confident that the dollar can carve out a bottom in Q1 as the vaccination rollout continues and the economy recovers (see below). However, the recent volatile price action suggests its recovery path won’t be a straight line.


The January retail sales data may have been a game-changer. Headline sales rose 5.3% m/m vs. 1.1% expected and a revised -1.0% (was -0.7%) in December, while sales ex-autos rose 5.9% m/m vs. 1.0% expected and a revised -1.8% (was -1.4%) in December. The so-called control group used for GDP calculations rose 6.0% m/m vs. 1.0% expected and a revised -2.4% (was -1.9%) in December. Elsewhere, headline PPI rose 1.7% y/y vs. 0.9% expected and 0.8% in December, while core PPI rose 2.0% y/y vs. 1.1% expected and 1.2% in December. January IP came in strong, rising 0.9% m/m vs. 0.4% expected and a revised 1.3% (was 1.6%) in December.

Really, data this week have been pretty much everything a dollar bull could ask for. Back month revisions to the sales data pale in comparison to this month's huge upside miss. Of note, the January surge more than offset the past three months of decline and so sales are back at all-time highs in absolute terms. The US data is key to whether the dollar can extend this current bounce. Indeed, higher US rates and improving US data will be the backbone of any dollar turnaround. Note that the increase in US Treasury yields has been underpinned by improving growth prospects, but also inflation expectations. Inflation breakeven rates across all tenures continue their relentless rise.

Fed manufacturing surveys for February will continue to roll out. Philly Fed survey is expected at 20.0 vs. 26.5 in January. Earlier this week, Empire survey came in at 12.1 vs. 6.0 expected and 3.5 in January. Markit reports preliminary February PMI readings tomorrow, with manufacturing expected at 58.7 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. So far, so good. January building permits (-1.4% m/m expected), housing starts (-0.5% m/m expected) and import/export prices will also be reported today.

Weekly jobless claims data will be watched closely. Regular initial claims are expected at 770k vs. 793k the previous week, while regular continuing claims are expected at 4.425 mln vs. 4.545 mln the previous week. Together with PUA initial claims, total initial claims fell to 1.1 mln (unadjusted) last week to the lowest since early January. So far, so good. However, PUA and PEUC continuing claims jumped by 2.6 mln. Combined with regular continuing claims, the total of 18.7 mln (unadjusted) last week is the highest since early December. These divergent trends suggest labor market stress is ongoing.

FOMC minutes are worth discussing. The Fed delivered a dovish hold at the January meeting and the downbeat minutes reflected this as officials noted “With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved.” There were some rays of hope, as “Participants remarked that the prospect of an effective vaccine program, the recently enacted fiscal support, and the potential for additional fiscal actions had led them to judge that the medium-term outlook had improved.” Since the January 26/27 meeting, the outlook has only gotten better and so we expect a more upbeat assessment at the March 16/17 meeting. That said, the Fed will continue to emphasize that it’s still to early too talk about tapering and that policy will remain accommodative for as far as the eye can see. Brainard and Bostic speak today.


Bank of England Deputy Governor Ramsden said there is room for more QE if needed. While he said the bank doesn’t rule out negative interest rates, Ramsden noted that QE is a “tried and tested tool.” He added that “It remains appropriate for policy to lean strongly against downside risks to the outlook.” The BOE last increased its QE program by GBP150 bln back in November and has recently been buying at the rate of GBP4.4 bln per week. Ramsden noted that “If we continued at that pace, the program would be complete at the start of November 2021. For that reason, and assuming no material worsening in market function, I would envision some further slowing in the pace at some point in the year.” We disagree and believe tapering is not in the cards this year as we believe the bank was much too optimistic its last meeting February 4. Next Bank of England decision is March 18. If the data disappoint in Q1, the bank may have to acknowledge more downside risks ahead and start talking more about expanding QE and less about tapering.

Turkey central bank kept rates steady at 17%, as expected. A handful of analysts looked for a 100 bp hike but it has been on hold since its last 200 bp hike in December. The bank pledged to tighten further if needed but noted that the impact of past hikes in credit will become more significant. CPI rose 14.97% y/y in January, the highest since August 2019 and further above the 3-7% target range. For now, Turkey’s growing external deficits are being easily financed but any loss of confidence in the central bank’s commitment to orthodox policy would be dangerous. TRY is by far the best performing EM currency this year at nearly 7.5% YTD, with RUB a distant second at 1% YTD.


Australia reported solid January jobs data. Jobs rose 29.1k vs. 30k expected and 50k in December, while the unemployment rate fell a couple of ticks to 6.4% vs. 6.5% expected. The jobs breakdown was good, with 59.0k full-time jobs offset by -29.8k part-time jobs. While the labor market continues to improve, the RBA’s most recent forecasts see unemployment falling to around 6% by the end of this year and 5.5% at the end of 2022. The bank has said it expects “very significant” monetary support will be needed for some time as it will take years to meet its inflation and unemployment goals, and that it is unlikely to tighten policy until 2024 at the earliest. Next RBA policy meeting is March 2 and no change is expected then. The continued rise in iron ore prices has boosted AUD and the January high near .7820 is back in sight. Break above would suggest .80 as the next big target.

Chinese markets have reopened from holiday with modest price action. Major Chinese equity indices were mixed (Shanghai Composite was up 0.5% and the CSI300 was down 0.7%) but still trading near record highs. The yuan was fixed weaker by 0.2% against the dollar. The PBOC injected the equivalent of $31 bln in 1-year loans into the system through its medium-term lending facility at a rate of 2.95%. Officials also pushed back against expectations (including from us) of liquidity tapering, saying it will remain accommodative for the time being.

Bank Indonesia cut rates by 25 bp to 3.50% as expected, and downgraded its growth forecast. The policy rate is now at the lowest since it was first introduced in 2016. Governor Warjiyo sounded optimistic about the prospects of the vaccine rollout but emphasized the near-term negative impact of the pandemic on growth and inflation expectations. He acknowledged that with room for further cuts limited, the bank could rely on unconventional measures such as QE and macroprudential policy to boost growth. Even after the cut, BI’s policy rate is still one of the highest in the region and so we aren’t ready to call an end to the rate cut cycle yet. There wasn’t much impact from the decision, with stocks down 0.4% and the rupiah flat.


Brent front month contract prices rose over $65 per barrel for the first time since last January. Some estimates place the crude production cut at 40%. As we would expect, the futures curve continues to invert (backwardation). However, it’s important to note that even though the shorter-dated contracts are rising faster, the back end is also rising, suggesting that the vaccine-drive recovery is still being priced in. Indeed, the rally in the rest of the commodity complex continues with iron ore up 6% and copper up 2.4%.

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