Dollar Steady as Markets Calm Post-Powell

February 24, 2021
  • Fed Chair Powell’s semi-annual testimony before the Senate Banking Committee went as one would expect; Powell did not seem concerned about rising rates; while there's been a lot of attention lately on the long end of the US curve, there is a lot of supply this week at the belly; Bank of Canada Macklem delivered dovish remarks
  • Brazil reports mid-February IPCA inflation; Mexico reports mid-February CPI; Turkish central bank took some additional steps to support the lira
  • RBNZ kept rates steady at 0.25%, as expected; a hike in the stamp duty for Hong Kong stocks led to a 3% decline in the Hang Seng; Taiwan reported strong January export orders; Moody’s affirmed Taiwan’s Aa3 rating and changed the outlook to positive from stable

The dollar is treading water with markets calmer post-Powell. DXY is basically flat but the clean break below 90.123 this week still sets up a test of the January low near 89.209. The euro has been unable to build on its recent gains, but sterling continues to power ahead to a new cycle high today near $1.4235 before falling back. It remains on track to test the April 2018 high near $1.4375. USD/JPY has recovered from its brief time below 105 yesterday and is back near 106. 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.

AMERICAS

Fed Chair Powell’s semi-annual testimony before the Senate Banking Committee went as one would expect. He acknowledged that developments point to an improved outlook later this year, but warned that the recovery was far from complete and the path ahead is highly uncertain. Powell said the Fed is a long way from its employment and inflation goals, noting that unemployment remains elevated even as improvement in the job market has slowed. He noted prices remain “particularly soft” in hard-hit sectors. This is a very dovish message and echoes his (and the Fed's) stance at the January 26-27 FOMC meeting.

It’s worth highlighting that Powell did not seem concerned about rising rates. Asked about the recent rise in long-term yields, he said “In a way, it’s a statement on confidence on the part of markets that we will have a robust and ultimately complete recovery.” He downplayed inflation fears, noting that even if prices spike a bit this year, the rise won’t be large or sustained and that the two decade trend of low US inflation is likely to continue. His comments helped stall the trend higher in US yield after several sessions of significant upwards moves. Perhaps most notably, the comments triggered a sharp recovery in the tech stocks, leading to a 3.5% intraday rally from its lows. Lastly, Powell would not comment in the prospects for Biden’s fiscal stimulus plans. However, he did note that there hasn’t been a strong relationship between budget deficits and inflation recently. Powell appears before the House Financial Services Committee today. Brainard and Clarida also speak today. January new home sales (1.5% m/m expected) will be reported.

While there's been a lot of attention lately on the long end of the US curve, there is a lot of supply this week at the belly. Today, $61 bln of 5-year notes will be sold, followed by $62 bln of 7-year notes tomorrow. Yesterday, $60 bln of 2-year notes were sold with bid/cover of 2.44 vs. 2.67 in January, indirect bidders (typically foreign demand) of 57.3% vs. 56.6% in January, and the yield of 0.119% vs. 0.125% in January. By law, 2-year notes have a minimum coupon of 0.125% and so this one was sold at a premium, which is another one of those strange things that happen in a zero rate world. This is a lot of supply for the market to absorb but it's worth noting that the belly has held up relatively well this past month and so demand may end up being solid, as the 2-year results suggest. Stay tuned.

Bank of Canada Macklem delivered dovish remarks. He said that “With a complete recovery still a long way off, monetary policy will need to provide stimulus for a considerable period.” Macklem noted that there was little sign of inflation before the pandemic despite unemployment at 40-year lows. at the time. He reiterated the bank’s latest forecasts the don’t see slack in the economy to be fully absorbed until 2023. This has become boilerplate language for every central bank, it seems, as Macklem pretty much repeated what Powell just said about the US verbatim. Next BOC meeting is March 10 and rates are expected to be kept steady at 0.25%.

Brazil reports mid-February IPCA inflation. Inflation is expected at 4.59% y/y vs. 4.30% in mid-January. If so, it would be the highest since May 2019 and closer towards the top of the 2.25-5.25% target range. Next COPOM meeting is March 17 and markets are pricing in the start of a tightening cycle with a 25-50 bp hike. If anything, Bolsonaro’s recent machinations regarding Petrobras suggests fiscal reform and austerity measures have taken a back seat. If so, fiscal policy that’s more expansive than expected could feed into price pressures and lead the central bank to tighten more than expected in the coming months. Budget numbers will likely take on great significance going forward.

Mexico reports mid-February CPI. Headline inflation is expected at 3.87% y/y vs. 3.33% in mid-January. If so, it would be the highest since October and closer to the top of the 2-4% target range. Banco de Mexico minutes will be released Thursday. At that meeting, the bank resumed its easing cycle with a unanimous decision to cut 25 bp to 4.0%. Since then, Deputy Governor Esquivel said he saw scope for two more cuts this year, with one possible at the next meeting March 25. He did warn that an expected spike in headline inflation due to higher fuel prices could delay that cut and so the minutes will be very important.

EUROPE/MIDDLE EAST/AFRICA

The Turkish central bank took some additional steps to support the lira. It raised required reserves on lira (+2 ppts) while the upper limit for FX holdings was boosted (from 30% to 20%). This nets out to an equivalent of $3.5 bln of additional lira reserves and a release of $0.5 bln in FX reserves into the system. The lira is off about 2.5% over the last few session but it’s still one of the top performing currencies in the EM space. We think the recent move is at least in part due to the CBRT’s reluctance to hike rates in the last meeting, a decision that was mostly expected, but still a missed opportunity to solidify the change in policy stand towards a more orthodoxy. Next policy meeting is March 18 and much will depend on how the lira continues to trade and also on February CPI data March 3.

South Africa Finance Minister Mboweni presents the 2021/22 budget. Given the poor economic outlook, he will likely signal further delays to repairing the nation’s public finances. At his October medium-term budget review, Mboweni forecast the budget deficit narrowing from -15.7% of GDP in 2020/21 to -7.3% in 2023/24, which would allow debt/GDP to stabilize at 95.3% by 2025/26. However, these forecasts were built on a set of assumptions that now appear to have been too optimistic. Growth was seen at 3.3% in 2021 after a -7.8% contraction in 2020, followed by 1.7% in 2022 and 1.5% in 2023, but the second wave of a mutated virus strain will likely lead to downward revisions to these forecasts.

ASIA

RBNZ kept rates steady at 0.25%, as expected. Like other central banks recently, the messaging was very dovish. The RBNZ said inflation and employment are likely to remain below targets and so “prolonged“ monetary stimulus remains necessary. It said that it will look through temporary price shifts and is prepared to provide additional stimulus if required. This includes lowering the official cash rate, as the RBNZ said that the operational work needed to go negative is now complete. Recall that at its last meeting November 11, the bank expressed skepticism about negative rates. Governor Orr said then that “it’s too early to tell” whether the RBNZ will need to take rates negative. Markets reacted accordingly to that less dovish tilt and so we think the RBNZ felt it had to push back at this meeting.

A hike in the stamp duty for Hong Kong stocks led to a 3% decline in the Hang Seng index. This was the first such hike since 1993. According to Bloomberg, Chinese investors sold the equivalent of $2.6 bln of local securities, a record number. Year to date, the Hang Seng index is up only 2.7%, well below the 13% gains of China’s CSI300 index or gains of over 20% in India, Korea, and Taiwan. The stamp duty was contained in the budget, which is meant to help pay for other measures to boost consumption and help the unemployed. Financial Secretary Chan outlined a plan to narrow the deficit from a record high -HKD260 bln in the current FY ending March 31 to -HKD101.6 bln in the coming FY, or -3.6% of GDP.

Taiwan reported strong January export orders. Orders jumped 49.3% y/y vs. 45.0% expected 38.3% in December. The strength is noteworthy as the timing of the Lunar New Year holiday would tend to boost y/y numbers for January and depress them in February. Of note, the government expects orders to rise between 43.0-48.2% in February. Recent strength here has been driven by semiconductors, as firms around the world try to lock in shipments amidst limited global supply.

Elsewhere, Moody’s affirmed Taiwan’s Aa3 rating and changed the outlook to positive from stable. The agency said the move reflects “increasing signs that Taiwan’s economy is more resilient and that its governance strength is stronger than previously assessed.” Moody’s added that the high-tech, export-oriented manufacturing sector is “likely to boost Taiwan’s competitiveness in the medium term, as changes in behaviors and work practices, underway before the pandemic and accelerated by it, continue to boost demand for its goods in the medium term.”

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