Dollar Remains Under Pressure in Jittery Markets

February 22, 2021
  • US Treasury yields continue to march higher, increasing concerns about the potential impact on other assets; we suspect the bond market is keeping a close eye in President Biden’s relief package; Fed manufacturing surveys for February will continue to roll out; otherwise, it’s a fairly quiet day for the US
  • The German IFO survey for February reflects emerging hope for the economic recovery; Israel is expected to keep rates steady at 0.10%
  • Japan reported weak January convenience store sales; RBA bought 3-year bonds for the first time since early December; Korean export data shows continued robust demand in the tech sector; Taiwan boosted its outlook for growth and exports; commodity are broadly higher, led by industrial metals

The dollar remains largely on its back foot. DXY is down three straight days and is nearing last week’s low near 90.118. A clean break below 90.123 would set up a test of the January low near 89.209. The euro is on track to test last week’s high near $1.2170, while sterling is making new highs for this move near $1.4050 and seems to be on track to test the April 2018 high near $1.4375. USD/JPY is trading around 105.50 and feels heavy. A break below 105.10 would set up a test of the February 10 low near 104.40. We are still confident that the dollar is carving out a bottom in Q1, but recent price action suggests its recovery path won’t be a straight line. In the EM space, MXN and ZAR continue to underperform. We believe these two should be watched as possible canaries in a coal mine for a larger breakdown in risk sentiment.


US Treasury yields continue to march higher, increasing concerns about the potential impact on other assets. The 10-year yield is just 3 bp shy of 1.40% driven by the usual combination of factors ranging from vaccine-fueled reflation to concerns about outright inflation. The 3-month to 10-year spread is now at 134 bp, the highest since February 2018 and seemingly on track to test the December 2016 high near 210 bp. Elsewhere, the 2- to 10-year spread is now at 126 bp, the steepest it’s been since early 2017 and on track to test its December 2016 high near 134 bp. Global equity markets are mostly lower today. Note, however, that breakeven inflation rates have been trending down over the last few sessions, pulling real yields higher.

We suspect the bond market is keeping a close eye in President Biden’s relief package. This week, Democrats will begin their final push to pass it by mid-March. Senate Majority Leader Schumer said “The Senate is on track to send a robust $1.9 trln package to the president’s desk before the March 14 expiration of unemployment insurance benefits” from the December round of stimulus, adding that “We will meet this deadline.” The House Budget Committee is expected to vote on it today, with a floor vote possible as soon as Friday. The real uncertainty lies in the Senate, where the razor-thin majority for the Democrats likely to be tested.

Fed manufacturing surveys for February will continue to roll out. Dallas Fed is expected at 5.0 vs. 7.0 in January. Richmond Fed reports tomorrow and is expected at 16 vs. 14 in January, while Kansas City reports Thursday and is expected at 15 vs. 17 in January. So far, Philly Fed came in at 23.1 vs. 26.5 in January and Empire survey came in at 12.1 vs. 6.0 in January, both stronger than expected. Of note, Markit preliminary February PMI readings were reported Friday, with manufacturing at 58.5 vs. 58.8 expected and 59.2 in January and services at 58.9 vs. 58.0 expected and 58.3 in January. This pushed the composite up a tick to 58.8.

Otherwise, it’s a fairly quiet day for the US. Kaplan and Bowman speak, while January Chicago Fed National Activity Index (0.50 expected) and leading index (0.4% m/m expected) will be reported.


The German IFO survey for February reflects emerging hope for the economic recovery. The headline number rose to 92.4 vs. 90.5 expected and a revised 90.3 (was 90.1) in January. The current assessment rose to 90.6 from 89.2 in January, while the expectations component jumped to 94.2 from a revised 91.5 (was 91.2) in January. GfK consumer confidence for March will be reported Thursday and is expected at -14.0 vs. -15.6 in February. The vaccination rate in Germany is still lagging well behind that of the US and UK, but in line with that the rest of the EU. Chancellor Merkel has proposed a 4-stage strategy for reopening, but it’s likely to be a slow and cautious process. As such, we continue to believe that the eurozone economy will underperform in Q1 and Q2.

Bank of Israel is expected to keep rates steady at 0.10%. At its last meeting January 4, the bank upgraded its growth forecasts to 6.3% this year and 5.8% next year under a rapid vaccination program but still projected that its policy rate would be in the 0.0-0.10% range in one year’s time. Until a workable government is sworn in, the burden of stimulus falls on the central bank and so it will likely continue its efforts to weaken the shekel. Ahead of the decision, Israel reports December manufacturing production.


Japan reported weak January convenience store sales. Sales fell -4.9% y/y vs. -4.0% in December. Department store and supermarket sales will be reported Thursday. They will give clues to January retail sales that will be reported Friday, which are expected to fall -2.6% y/y vs. -0.2% in December. Lockdowns are expected to depress activity in Q1 and we still expect another round of fiscal stimulus by the summer, especially if Suga’s popularity continues to worsen.

RBA bought 3-year bonds for the first time since early December. Under its YCC program, the bank aims to keep 3-year yields at 0.10%. its purchases failed to do so and so further purchases are expected this week. Luckily, the RBA just boosted its QE program by AUD100 bln at this month’s meeting and extended it beyond mid-April. Since the February 2 meeting, the Australian yield curve has steepened sharply, with 20- and 30-year yields up 40 bp and 12- and 15-year yields up nearly 50 bp. Furthermore, AUD has been the top performing major currency over the same period, up 3.3% vs. USD. Next meeting is March 2 and the RBA may have to push back stronger against these curve steepening and AUD strengthening trends.

Korean export data shows continued robust demand in the tech sector. Exports rose 16.7% y/y for the first 20 days of February, supported by semiconductor shipments (+27.5%).Exports in the automobile sector (+45.9%) were also very strong. Imports spiked 24.1% y/y over the same period. The export strength is noteworthy since the timing of the Lunar New Year holiday would tend to boost y/y numbers for January and depress them in February. Average daily exports take this into account and rose an even stronger 29.2% y/y during the same period. The data bode well for regional trade and activity.

Taiwan boosted its outlook for growth and exports. The statistics bureau now says exports will likely rise 9.58% this year vs. 4.59% previously, while GDP may grow 4.64% vs. 3.83% previously and up from a revised 3.11% in 2020. Of note, the government said increased demand for semiconductors was a key reason for the upgraded 2021 forecasts, but warned that the rising trade surplus was likely to put upward pressure on the currency.


Commodity are broadly higher, led by industrial metals. Copper, in particular, continues its incredible rally propelled by the reflation trade, infrastructure spending, and growing demand for electric vehicles. It’s a similar story for iron ore (minus the electric vehicle part), with continued high demand coming from China. In the energy sector, rising oil prices increases the risk of a change in supply cuts by OPEC+. Once again, it seems like Saudi Arabia (in favor of keeping output restrictions) and Russia (looking to increase supply) are on opposite sides of the discussion. Separately, Bitcoin hit a new record high over the weekend at nearly $59,000 before falling back to $55,600.

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