Dollar Gains With Markets in Risk-Off Mode

March 04, 2021

US data yesterday came in weaker than expected; weekly jobless claims will continue to hold interest; Fed Beige Book report came in as expected; Fed Chair Powell’s speech will be close watched; posted a rare day of outperformance yesterday after a benign outcome of an important fiscal bill in Congress
UK Chancellor Sunak  presented his budget; German Chancellor Merkel unveiled plans for reopening; eurozone reported very weak February retail sales; ECB Governing Council member Weidmann did not sound very concerned
Yields spiked after RBA defied market expectations that they would ramp up bond buying; Australia reported final January trade and retail sales; Malaysia kept rates steady at 1.75%, as expected

The dollar remains firm as risk appetite takes a hit.  DXY is approaching this week’s high near 91.394 and we believe it remains on track to test the February 5 high near 91.602.  Break above that would set up a test of the November 23 high near 92.80.  The euro remains heavy and is likely to break below $1.20 to test the February 5 low near $1.1950.  Sterling remains heavy below $1.40 as the budget did it no favors (see below).  USD/JPY continues its march higher and is trading at the highest level since July near 107.35.  It is on track to test the July high near 108.15. 

The move higher in global yields has so far done little to spook the corporate bond market. Spreads, measured by the Bloomberg Barclays Index, are still trading along pre-pandemic levels both in the US and Europe for the high yield sector. The same goes for the Itraxx indices. The suggest that the reflation narrative, including continued government aid, remains well alive at least for this sub-set of investors.


US data yesterday came in weaker than expected.  First, ADP reported 117k private sector jobs added in February vs. 205k expected.  Then, ISM services PMI came in at 55.3 vs. 58.7 expected and actual in January.  Of note, the employment sub-index fell to 52.7 vs. 55.2 in January.  Disappointing, for sure, but with $1.9 trln coming down the pike, I suspect markets will remain optimistic.  Consensus for February jobs data Friday is currently at 200k but after this most recent round of data, we suspect the whisper number will be closer to 100k. 

Weekly jobless claims will continue to hold interest. Regular initial claims are expected at 750k vs. 730k the previous week, the lowest since late November.  Regular continuing claims are expected at 4.3 mln vs. 4.419 mln the previous week, the lowest since March and were for the survey week containing the 12th of the month.  Emergency continuing claims edged up by nearly 1 mln to 12.58 mln last week but are lagged and so this week’s numbers will be for the BLS survey week.  All in all, the labor market is back on track to healing, albeit slowly.  February Challenger job cuts and January factory orders (1.8% m/m expected) will be reported.

The Fed Beige Book report came in as expected.  The economy expanded “modestly” for most Fed districts during the period covered, which ran from January 5 to February 22.  Also, most districts saw job increases, “albeit slowly.”  It saw most businesses as optimistic for the next 6-12 months due to the vaccine roll out.  All in all, this was the tone that was expected, namely optimism tempered with some acknowledgment that there has been a loss of momentum.  

Chair Powell’s speech will be close watched.  We think he should use this opportunity to push back more forcefully on bond market price action since his Congressional testimony last week.  At midnight Friday, the media embargo goes into effect and there will be no more Fed speakers until Chair Powell’s post-decision press conference March 17.  US fixed income markets have calmed down a bit since last week’s carnage but we think this calm is very fragile. The 10-year rose almost 10 bp yesterday but has since found a range between around 1.45-1.48%. The curve’s shape remains very steep but longer-dated breakeven rates and real yields have stabilized over the last few sessions.
The Brazilian real posted a rare day of outperformance yesterday after a benign outcome of an important fiscal bill in Congress.  It also got a bit of help from the central bank. The Senate backed the latest pandemic relief package worth nearly $8 bln. Most importantly, the bill will maintain some of the conditions to ensure spending doesn’t blow off the cap. Meanwhile, the central bank continues to sell dollars to stabilize the currency, with accumulated interventions this year of around $9 bln. The real is still the underperformer amongst major EM currencies, down 7% this year and 6% over the last six months.


UK Chancellor Sunak  presented his budget.  He presented a sober outlook but most of the budget  details came in as expected.  Rather than list them, we highlight the most important element as the planned hike in the corporate tax in 2023 to 23% from 19% currently.  This will be the first hike in nearly 50 years.  The budget was short-term expansionary, as Sunak set out GBP73 bln of additional fiscal support through April 2023.  Longer-term, it will be contractionary as tax hikes over the next three years hit the economy.  The overall tax burden for the economy (revenue as a share of GDP) is expected to rise to 35% by 2026, the highest since the late sixties.  Sunak warned that without corrective action, borrowing would remain high. However, he is taking a big gamble as the fiscal contraction would start just ahead of the likely general election in 2024.    

German Chancellor Merkel unveiled plans for reopening.  This comes after Chancellor Merkel and the 16 state premiers held talks this week.  Hairdressers will reopen this week, while bookstores, florists, and gardening centers will be allowed to reopen this coming Monday.  More easing of restrictions is expected in the coming weeks.  Measures will be revisited every two weeks and will depend on local infection rates.  Hotels, restaurants, and other non-essential retail will remain closed until March 28.  It’s a risky move given the challenges in vaccine rollout, showing just how strong the popular and political pressure for reopening has become in Germany.

The eurozone reported very weak February retail sales.  They were expected at -1.4% m/m vs. a revised 1.8% (was 2.0%) in December.  Instead, sales plunged a more than fourfold -5.9% m/m. The warning signs were there, however, as Germany reported weak sales this week of -4.5% m/m and France reported weak January consumer spending last week of -4.6% m/m.  Weakness in the eurozone economy is a given in Q1 due to the lockdowns, but policymakers are looking ahead to Q2.  They want financial conditions to remain loose so that when economies do reopen, the table will be set for strong rebound.

Yet ECB Governing Council member Weidmann did not sound very concerned.  He said the size of recent moves in yields was not “particularly worrisome,” but added that the ECB stands ready to act to offset unwarranted tightening of financial conditions.  Weidmann noted that the ECB looks at conditions beyond just government bond yields.  Lastly, he noted that the PEPP is flexible and that a deposit rate cut is one of the ECB’s tools.  It’s really not surprising that the Bundesbank head is more on the "not so worried" side of the ECB aisle.  With mixed messages being still being sent, we think the market will test the ECB's resolve in the coming weeks.


Australian yields spiked after RBA defied market expectations that they would ramp up bond buying.  Today’s bond purchases were light even as the 3-year yield rose 1 bp to 0.13%, further above the 0.10% target.  Further out the curve, the 10-year yield rose 10 bp to 1.76%, while the 30-year yield rose 9 bp to 2.70%.  While below last week’s highs, these yields are likely to continue creeping higher as the markets tests the RBA’s commitment to YCC.  To its credit, the RBA is trying to be unpredictable.  As those of us in the FX market know, intervention works best when it is a surprise and when it goes in the same direction as the market.

Elsewhere, Australia reported January trade and final retail sales.  Exports rose 6% m/m vs. 4% expected and 3% in December, while imports fell -2% m/m vs. -4% expected and -2% in December.  Export strength is noteworthy as preliminary trade data showed a sharp -9% m/m drop in exports.  Elsewhere, sales rose 0.5% m/m vs. 0.6% preliminary and -4.1% in December.  The economy has been performing solidly but signs of softness in the mainland China economy are cause for concern. No wonder the RBA is doubling down on its YCC. 

Bank Negara Malaysia kept rates steady at 1.75%, as expected.  A couple of analysts looked for a 25 bp cut to 1.5%.  The message was a little more upbeat, as the bank noted “Growth is projected to improve from the second quarter onward, driven by the recovery in global demand, increased public and private sector expenditure amid continued support from policy measures and more targeted containment measures.”   At the last meeting January 20, , the bank left the door open for further easing by noting that policy going forward “will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.”  While this suggests the easing cycle has ended, the lack of any price pressures should allow for another cut this year if needed.

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