Pressure on Dollar Picks Up Post-Powell

February 25, 2021
  • The second leg of Fed Chair Powell’s Congressional testimony contained no surprises; long end yields continue to trend higher; Fed manufacturing surveys for February will continue to roll out; we get our second look at Q4 GDP; weekly jobless claims data will be watched closely
  • Brazil approved the central bank independence bill yesterday; Banco de Mexico minutes will be released; eurozone has had a quiet day; South African budget released yesterday was a positive surprise
  • Japan reported weaker January department store and supermarket sales; the RBA finally resumed its bond purchases in earnest but had little impact on yields; NZD rallied on a proposal for the RBNZ to include housing market risk in its mandate; Korea kept rates steady at 0.5%, as expected

The dollar is coming under pressure post-Powell. DXY traded at a new low for this move near 89.692 today and is nearing the January low near 89.209. The euro has finally broken above $1.22 and puts it on track to test this year’s high near $1.2350. Sterling’s rally has stalled out but it remains on track to test the April 2018 high near $1.4375. USD/JPY has recovered from its brief time below 105 and is back above 106 and nearing this month’s high near 106.20. 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

The second leg of Fed Chair Powell’s Congressional testimony contained no surprises. He repeated his dovish stance to the House Financial Services Committee. Powell was asked several times about the risks of overheating as another round of fiscal stimulus comes as the Fed remains accommodative, but he pushed back against this notion. Powell’s stance was reinforced by other senior Fed officials yesterdays. Vice Chair Clarida expressed cautious optimism on the economic outlook but said it would “take some time” to bring the economy back to pre-pandemic levels. Governor Brainard said inflation remained “very low” and the economy was still far from the Fed’s goals. Bostic, Bullard, Quarles, and Williams all speak today.

While Powell may have alleviated concerns about an imminent Taper Tantrum, long end yields continue to trend higher. The 10-year yield is now 1.45% and the curve is steepening further. Powell’s comments seemed to have a greater impact in the tech stocks, leading to the largest gain in the Nasdaq in over two weeks. However, Nasdaq futures have turned negative at the time of writing.

Fed manufacturing surveys for February will continue to roll out. Kansas City reports Thursday and is expected at 15 vs. 17 in January. So far this week, Dallas Fed came in at 17.2 vs. 7.0 in January and Richmond Fed came in unchanged from January at 14. Before that, 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. Chicago PMI will be reported Friday and is expected at 61.0 vs. 63.8 in January.

We get our second look at Q4 GDP. The economy is expected to have grown 4.2% SAAR vs. 4.0% preliminary and 33.4% in Q3. However, this is old news and markets are already looking ahead to 2021. The Atlanta Fed’s GDPNow model suggests Q1 growth is 9.5% SAAR but will be updated later today, while the New York Fed’s Nowcast model suggests Q1 growth is 8.3% SAAR but will be updated tomorrow. Of note, Bloomberg consensus for Q1 is currently at 3.5% SAAR. January durable goods orders (1.0% m/m expected) and pending home sales (flat m/m expected) will also be reported.

Weekly jobless claims data will be watched closely. Regular initial claims are expected at 825k vs. 861k the previous week, while regular continuing claims are expected at 4.46 mln vs. 4.494 mln the previous week. Together with PUA initial claims, total initial claims fell last week to 1.1 mln (unadjusted), the lowest since early January. However, PUA and PEUC continuing claims jumped by 2.6 mln last week. Combined with regular continuing claims, the total of 18.7 mln (unadjusted) last week is the highest since early December. This week’s continuing claims data will be for the BLS survey week containing the 12th of the month and will be very important. Consensus for February NFP due out next Friday is currently at 143k vs. 49k in January but is subject to many revisions as more and more clues will be revealed in the coming days.

The Brazilian government approved the Central Bank independence bill yesterday. This is a positive development but is being overshadowed by the deteriorating political backdrop. The legislation guarantees de jure autonomy for the BCB, helping insulate it from political interference. The governor will have a fixed 4-year term and will no longer be part of the cabinet of ministers. We have been saying since last year that while it will make little difference now, this measure might prove extremely important in the next few years. Recall that the fiscal expansion in Brazil was amongst the largest in the EM space, and the Treasury is already facing challenges in issuing debt in longer maturities. As the cost of pandemic pile up, we will see governments tempted to enact short-term unconventional policies (perhaps MMT inspired) to resolve their spending constrains. Central bank independence should prevent these policies from getting out of hand.

Banco de Mexico minutes will be released. At the February 11 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. Yesterday, mid-February CPI came in at 3.84% y/y vs. 3.87% expected and was the highest since October and closer to the top of the 2-4% target range.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has had a quiet day. Germany GfK consumer confidence for March was reported. It came in at -12.9 vs. -14.0 expected and a revised -15.5 (was -15.6) in February. Earlier this week, IFO business climate for February came in at 92.4 vs.90.5 expected and a revised 90.3 (was 90.1) in January. That gain was driven by the forward looking expectations component. With the February PMIs also coming in firm, it seems the German economy is poised for a solid rebound. As always, this will hinge in large part on the vaccine rollout and reopening. Elsewhere, eurozone January M3 growth came in at 12.5% y/y vs. a revised 12.4% (was 12.3%) in December. While this was at consensus, M3 growth hit a new cycle high and is the fastest since November 2007.

The South African budget released yesterday was a positive surprise. Spending will increase a lot, of course, with more funds flowing to vaccines and post-pandemic recovery spending, while planned tax hikes will be scrapped. The estimated peak debt to GDP ratio was revised down from 95% to 89%, in large part due to a freeze in state-sector worker wages. Assuming the government has the political will to keep this commitment, it could mean a significant improvement for the country’s fundamentals. That said, we are eyeing this with a bit of skepticism given the nation’s poor track record at following through on fiscal reforms. We saw some minor decline in South Africa’s CDS yesterday, in line with the moves in other EMs, and the rand performed slightly better. Longer dated yields declined yesterday but are sharply higher today, driven by a global trend of higher rates.

ASIA

Japan reported weaker January department store and supermarket sales. The former fell -29.7% y/y vs. -13.7% in December, while the latter rose 1.2% y/y vs. 2.7% in December. The weakening is not surprising given the lockdowns instituted that month but still suggest downside risks to January retail sales that will be reported Friday, which are expected to fall -1.2% m/m vs. -0.7% in December. With those lockdowns ending soon, the economy should start to improve but Q1 is clearly a lost quarter for growth.

The Reserve Bank of Australia finally resumed its bond purchases in earnest. It bought a record-matching AUD5 bln of bonds, with AUD3 bln to spent on returning the 3-year bond back to the 0.10% target and AUD2 bln spent on pushing down longer-term yields. Yet yields mostly rose despite the RBA action. While the 3-year yield fell a few basis points, it remains above the target and so further action will be required. Furthermore, the RBA did nothing for the rest of the curve, with 10-year yields up 12 bp and 30-year yields 14 bp. Over the past week, the 15- to 30-year portion of the curve has risen 40 bp and the 10- to 12-year portion by over 35 bp. It seems that an interesting credibility experiment is underway in Australia that is likely to eventually spread to other countries. That is, the market believes yield should be higher and the RBA does not. The Australian dollar broke above the 0.80 area to trade at a 3-year high and the January 2018 high near .8135 is coming in to focus.

The New Zealand dollar has rallied on a proposal for the RBNZ to include housing market risk in its mandate. The government is looking to amend the RBNZ’s mandate so that it considers “the impact on housing when making monetary and financial policy decisions,” according to Finance Minister Robertson. This discussion started last year but received push back by RBNZ governor Orr, who said that cooling the housing market should be done via macroprudential tools. We fully agree, as interest rate hikes are a blunt instrument that will impact other sectors as well. Robertson said that “Today’s announcement is just the first step as the government considers broader advice about how to cool the housing market.”

The move is unusual, to say the least, as governments in general tend to favor looser monetary policy over tighter. With the housing market red hit, the change would imply that the RBNZ would have to tighten sooner rather than later. Indeed, markets are now pricing in rate hikes this year with a nearly 50% chance of a hike by the last meeting in November, according to the Bloomberg model. The kiwi is up nearly 4% this year, on par with the performance of the Aussie and sterling.

Bank of Korea kept rates steady at 0.5%, as expected. CPI rose 0.6% y/y in January, well below the 2% target. As he did at the last policy meeting January 15, Governor Lee again stressed that any talk of withdrawing stimulus at this stage is premature. He downplayed inflation risks, noting that supply-side pressures from commodity prices were unlikely to lead to a sustained rise in inflation. The bank kept its growth forecast for this year steady at 3% but raised its inflation forecast to 1.3% from 1.0% previously. Lastly, Lee said he’s closely monitoring recent rise in bond yields and stressed that the bank stands ready to take action if market volatility increases. For now, we believe monetary policy will be kept at current accommodative settings through 2021. With a supplemental budget to be unveiled next week, it’s clear that fiscal policy is carrying the load now.  

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