Dollar Builds on Post-CPI Gains

November 11, 2021
  • U.S. October CPI data yesterday was a wake-up call for global markets; Fed lift-off expectations have reset higher and that's giving the dollar a big boost; Treasury sold $25 bln of 30-year bonds yesterday, completing the $120 bln quarterly refunding
  • ECB’s Holzmann said QE could end next fall; U.K. reported disappointing data; outlook for the BOE’s December 16 decision basically remains a coin toss; Turkey’s current account balance surprised on the upside
  • Japan reported October PPI; Prime Minister Kishida signaled some upcoming plans to aid the economy; Australia reported very weak October jobs data; Chinese property developer stocks bounced on speculation of forthcoming policy support

The dollar continues to gain after yesterday’s CPI shocker. DXY broke above the September 2020 high near 94.742 and is trading above 95 for the first time since July 2020. There really aren't any major chart points until the June 2020 high near 97.802. Similarly, the euro has broken below $1.15 for the first time since July 2020 and the next major chart point is the June 2020 low near $1.1170. The 2-year US-German differential has risen to 123 bp, the highest since March 2020, and points to further euro losses. Sterling broke below the September low near $1.3410 and is trading below $1.34 for the first time since December 2020, which sets up a test of that month’s low near $1.3135. USD/JPY traded above 114 for the first time in a week as it finally participated in the broad dollar rally. If USD/JPY can break above last month's high near 114.70, there really aren't any significant chart points until the December 2016 high near 118.65.

The broad underperformance trend for emerging markets assets continues through the year. Despite many of fragile EM central banks having primitively started their tightening cycle ahead of G10 central banks, it wasn’t enough to hold up against the broad dollar appreciating trend currency performance (in aggregate). Similarly, vigorous domestic stimulus programs and a relatively strong global economic recovery haven’t done much (in aggregate) to help EM equities. Since the start of the year, MSCI EM has been on a steady downward trend when seen as a ratio of the MSCI world. Unfortunately for EM, we don’t see much scope for near-term reversal of this this trend, especially with the multiple headwinds facing China.


U.S. October CPI data yesterday was a wake-up call for global markets. Both headline and core inflation came in higher than expected at 6.2% y/y and 4.6%, respectively. Both are at new cycle highs and both show a second straight month of accelerating m/m gains, so the transitory theme remains under fire. With low base effects from November and December 2020 in place, the y/y rates are very likely to move even higher from these already lofty levels. The Fed’s preferred measure of inflation (core PCE deflator) won’t be reported until November 24 but it seems very likely to accelerate from the 3.6% y/y pace in September.

Fed lift-off expectations have reset higher and that's giving the dollar a big boost. The Fed is nowhere near hiking rates but we understand why officials want to get tapering done quickly so that they have maximum flexibility to hike next year if needed. We still think Q2 seems too soon for lift-off but market now sees a nearly two thirds chance. Q3 liftoff is fully priced in, as is another hike in Q4. The 2-year yield rose to 0.51% yesterday after ending last week at 0.40%, while the 10-year yield rose to 1.55% after ending last week at 1.45%. U.S. bond market is closed today for the Veterans Day holiday. With growth strong and wages and inflation still rising, the case remains strong for higher U.S. rates.

The U.S. Treasury sold $25 bln of 30-year bonds yesterday, completing the $120 bln quarterly refunding. Indirect bidders took only 59.0% vs. 70.5% at the previous auction, while the bid/cover ratio was 2.20 vs. 2.36 previously. It appears that demand weakened with each successive auction this week. On Tuesday, $39 bln of 10-year notes were sold. Indirect bidders took 71.0% vs. 71.1% at the previous auction, while the bid/cover ratio was 2.35 vs. 2.58 previously. On Monday, $56 bln of 3-year notes were sold. Indirect bidders took 57.6% vs. 44.2% at the previous auction, while the bid/cover ratio was 2.33 vs. 2.36 previously.


ECB’s Holzmann said QE could end next fall. If memory serves, this may be the first time that any ECB policymakers has tipped an exit strategy of any sort. Holzmann said that the ECB’s APP was designed to boost inflation, adding that if inflation has sustainably returned to the 2% target, “the elimination of the condition and therefore the end of the program could - depending on the inflation development - happen in September or at the end of the year.” Holzmann added that he is against any changes to APP and does not want another round of TLTROs. Of note, Holzmann heads up the Austrian central bank and thus has hawkish DNA. We do not think the majority at the ECB shares this hawkish take but we will know more on December 16, when the ECB is set to announce its plans for QE (PEPP and APP) going forward.

U.K. reported disappointing data. Q3 GDP grew 1.3% q/q vs. 1.5% expected and 5.5% in Q2, and the mix was concerning. Private consumption rose 2.0% q/q vs. 3.1% expected while GFCF rose 0.8% q/q vs. 2.4% expected. Net trade was a drag on growth, with exports contracting -1.9% q/q and imports rising 2.5% q/q. Government spending was the lone bright spot, growing 0.9% q/q vs. 0.7% expected. Looking at the monthly data, IP fell -0.4% m/m vs. 0.2% expected and a revised 1.0% (was 0.8%) in August, construction rose 1.3% m/m vs. 0.2% expected and a revised -0.7% (was -0.2%) in August, services rose 0.7% m/m vs. 0.5% expected and a revised 0.1% (was 0.3%) in August, and the trade deficit came in at -GBP2.777 bln vs. -GBP3.256 bln expected and a revised -GBP1.88 bln (was -GBP3.716 bln) in August. The data have been disappointingly soft in recent months and today’s data continue that trend, which is the simplest explanation for the BOE’s about face last week.

The outlook for the BOE’s December 16 decision basically remains a coin toss. Ahead of that decision, the November data dump and CPI will be released, giving policymakers one last look at the economy before making their choice. WIRP suggests nearly 50-50 odds for a hike then, but is fully priced in for February 3. The bank will have to work hard to regain its credibility in the coming months. Next week will provide some more clues, with labor market data, CPI, and retail sales to be released.

Turkey’s current account balance surprised on the upside with a surplus of $1.65 bln in September vs. expectations for $1.25 bln. Improved tourism and net portfolio inflows of $1.22 bln is good news, offsetting the huge energy import deficit. However, the data did little to boost the lira as USD/TRY is well on its way to TRY10.0. We still see few silver linings for Turkish assets and remain firm on our view to stay on the sidelines until a material policy change takes place.


Japan reported October PPI. It was expected at 7.0% y/y but instead rose 8.0% y/y vs. a revised 6.4% (was 6.3%) in September. Despite rising PPI, there has so far been little pass through to the CPI, which is barely in positive territory. Next Friday, October national CPI will be reported. The Bank of Japan stands out as the most dovish major central bank and will undoubtedly be the last amongst the majors to tighten. Next policy meeting is December 16-17 and no change is expected then.

Prime Minister Kishida signaled some upcoming plans to aid the economy. He said his government would release plans this week for dealing with any new waves of virus infections. He added that his government would draw up details of its widely expected stimulus package next week, flagging a JPY100,000 per family payment to help struggling households. He confirmed that the stimulus package would be in the tens of trillions of yen. With fiscal stimulus on the way, the BOJ will remain on hold for the foreseeable future.

Australia reported very weak October jobs data. A gain of 50.0k was expected but instead a loss of -46.3k was posted vs. a revised -141.1k (was -138.0k) in September. The mix was not good, as the bulk of the losses (-40.4k) were full-time jobs. The unemployment rate rose to 5.2% vs. 4.8% expected and 4.6% in September, the highest since April and suggesting very little risk of accelerating wage pressures. No wonder the RBA’s Statement of Monetary Policy underscored the likelihood that lift-off won’t be seen until 2024. Next policy meeting is December 7 and no change in policy is expected then.

Chinese property developer stocks bounced on speculation of forthcoming policy support. While we expected this outcome for some time, markets have drawn some confront from headlines suggesting the government will take a softer approach to the sector. Also of note, Evergrande made its latest payment of $150 mln before the coupon’s 30-day grace period ended, hence once again averting default.

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