Dollar Firms Ahead of CPI and US 10-year Auction

March 10, 2021

US inflation data take center stage; heavy US Treasury issuance continues; President Biden’s stimulus plan should be approved today in the House; February budget statement will draw some attention; Canada is expected to keep policy unchanged
Tensions between the EU and UK are rising on several fronts; the ECB released more details of its bond-buying operations; France reported strong January IP
RBA Governor Lowe delivered a dovish message; China reported February money and new loan data

The dollar is resuming its climb.  DXY has found some support near 92 and is clawing back some of yesterday’s losses. Some profit-taking and consolidation was to be expected after its recent run but we believe DXY is on track to test the November 23 high near 92.80 and then the November 11 high near 93.208.  The euro is trading just below $1.19 and the recent break below the February 5 low near $1.1950 sets up a test of the November 23 low near $1.18 and then the November 11 low near $1.1745.  Sterling is having trouble breaking back above $1.39 but has held up relatively well, pushing the EUR/GBP cross back towards the cycle low near .8541. The rise in USD/JPY has slowed a bit after yesterday’s break above 109 did not result in any follow-through buying. However, we believe the pair remains on track to test the June 5 high near 109.85.

AMERICAS

US inflation data take center stage.  February CPI will be reported today, with headline expected at 1.7% y/y vs. 1.4% in January and core expected steady at 1.4% y/y.  PPI will be reported Friday, with headline expected at 2.7% y/y vs. 1.7% in January and core expected at 2.6% y/y vs. 2.0% in January.  Such acceleration would be noteworthy, especially coming before the low base effects that will boost y/y readings in March, April, and May.  US yields are up today, helping to give the dollar some traction.

The data come amidst heavy US Treasury issuance this week.  There will be a $38 bln 10-year note auction today and a $24 bln 30-year bond  auction tomorrow. At the last 10-year auction,  indirect bidders took 60.6% and the bid-to-cover ratio was 2.37 for a yield of 1.155%. Yesterday, the $58 bln 3-year note auction had mixed results.  Indirect bidders took 47.8% vs. 52.7% at last month’s auction, while the bid-to-cover ratio was 2.69 vs. 2.39 previously. The yield rose to 0.355% vs. 0.196% previously, with 90.3% awarded at the high yield. If memory serves,  these metrics have improved as the week went by for other recent UST auctions. Let's see if history repeats with the 10-year auction today.

President Biden’s stimulus plan should be approved today in the House.  This should allow President Biden to sign it into law well before the March 14 deadline, when some unemployment benefits from the previous package expire. Coming in at a larger than expected $1.9 trln, the bill is leading many economists to lift their 2021 growth forecasts. President Biden is already looking to his next initiative, the long-awaited infrastructure plan. More fiscal spending is coming later this year and that should keep the economy humming well into H2.

The February budget statement will draw some attention.  A deficit of -$305 bln is expected vs. -$162.8 in January.  If so, the 12-month total would rise to another record high -$3.54 trln.  Higher outlays continue to put upside pressure on the deficit and that is only going to get worse as the next round of spending is likely enacted this month.  For now, the market has been able to absorb the issuance but this week will provide yet another big test of its appetite.    

Bank of Canada is expected to keep policy unchanged.  At its last meeting January 20, the bank delivered a dovish hold, noting that considerable slack remains in the economy that will continue to require “extraordinary” support.  The bank said inflation is unlikely to return “sustainably” to the 2% target until 2023, with excess supply expected to keep a lid on inflation over the horizon.  Most importantly, Governor Macklem admitted that the bank spent a “good bit” of time discussing the amount of stimulus needed and that a so-called “micro-cut” is one option available.  Macklem also pushed back a bit against the strong Loonie then, noting that it poses some risks to the outlook as more appreciation would create additional headwinds.  Since that meeting, CAD has been pretty much flat.   


EUROPE/MIDDLE EAST/AFRICA

Tensions between the EU and UK are rising on several fronts.  UK Prime Minister Johnson announced the UK will not introduce export documents for food crossing the Irish Sea to Northern Ireland starting April 1 as previously agreed. The EU has issued a legal challenge that could result penalties that include tariffs. Elsewhere, the EU accused the UK of blocking vaccine exports. While the UK denied this, the EU’s accusation is particularly galling since that is exactly what the bloc has done.   European Council President Michel later softened his language but it’s clear that trust between the two sides is at its lows post-Brexit.

The ECB released more details of its bond-buying operations.  For the week ending March 5, redemptions came in at a relatively high EUR6.3 trln. Without them, gross purchases were EUR18.2 bln, up from EUR16.9 bln the week prior but still lower than the three weeks prior of EUR18,3 bln, EUR19.6 bln, and EUR18.4 bln.  Markets have yet to test the ECB like they have the RBA but we think it's going to happen in the coming weeks. Much will depend on what the ECB says this Thursday. Please see our preview here.

France reported strong January IP.  Growth came in at 3.3% m/m vs. 0.5% m/m expected.  So far, Italy has reported IP up 1.0% m/m vs. 0.8% expected, while Germany has reported it at -2.5% m/m vs. -0.4% expected.  Eurozone IP will be reported Friday and is expected to rise 0.3% m/m vs. -1.6% in December.  Yet we know Q1 is a lost quarter in terms of growth due to the lockdowns. Markets should instead look ahead to Q2, and the slow vaccine roll out suggests the bounce back will be somewhat limited. This is another reason why the ECB should be concerned about tighter financial conditions and the need to keep yields low. 


ASIA

RBA Governor Lowe delivered a dovish message.  Quite bluntly, he said the market is wrong in its assessment of RBA policy, noting “Over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.” He added that  the improved inflation expectations priced in by markets aren’t particularly high and remain largely within the RBA’s 2-3% inflation target range. Lastly, Lowe stressed that in order for inflation to return to the target range, it will likely require wage growth above 3%, noting it’s currently running at a record-low 1.4%. Simply put, “It is a long way back to seeing wage increases consistent with the inflation target.”  While Lowe said nothing new compared to the recent RBA meeting, it was necessary to push back against market expectations. Next policy meeting is April 6.  We suspect the story of rising Aussie yields is by no means over yet and that stronger RBA action may become necessary then.

China reported February money and new loan data.  New loans came in at CNY1.36 trln vs. CNY950 bln expected and CNY3.58 trln in January, while aggregate financing came in at CNY1,71 trln vs. CNY910 bln expected and CNY5.17 trln in January.  Much of the drop is due to the Lunar New Year holiday, but we believe there is some element of deleveraging as well. March data will be key in determining how much the PBOC will allow credit growth to slow this year as the economy normalizes. China also reported February CPI and PPI.  CPI came in a tick higher than expected at -0.2% y/y vs. -0.3% in January while PPI came in a couple of ticks higher than expected at 1.7% y/y vs. 0.3% in January.  The latter was driven by higher commodity prices, especially industrial metals. On the CPI side, food prices decelerated by 0.2% y/y, with an especially fast rate of price decline in pork. We see nothing in the inflation to suggest any change to what we expect to be a gentile removal of accommodation by the PBOC.
 

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