Dollar Builds on Post-NFP Gains

February 06, 2023
  • The strong Friday data had obvious implications for Fed policy; U.S. yields are finally showing some signs of life; the dollar has gained but it’s not just from the Fed side Canada reports January Ivey PMI
  • ECB hawks are being very vocal; eurozone reported soft December retail sales; Germany reported firm December factory orders; BOE MPC member Mann remains hawkish; SEK traded at its weakest since 2009
  • Reports suggest the government will submit its nominations for the BOJ posts to parliament next week; Australia reported soft Q4 real retail sales

The dollar is firm in the wake of Friday’s jobs report. DXY is up for the third straight day and traded near 103.383, the highest since January 11. It has recovered over half of this year’s drop and a break above 103.793 would set up a test of the January high near 105.631. The euro is trading at the lowest since January 12 near $1.0760 despite hawkish ECB comments (see below). A break below $1.0695 would set up a test of the January 6 low near $1.0485. Sterling remains soft despite hawkish BOE comments (see below) and the recent break below $1.2075 sets up a test the January 9 low near $1.1840. USD/JPY traded at the highest since January 11 near 132.55 on reports that BOJ Deputy Governor Amamiya has been approached about becoming the new Governor (see below). Today’s break above 131.90 sets up a test of the January 6 high near 134.75.


The strong Friday data had obvious implications for Fed policy. Simply put, it confirms our long-standing belief that the Fed will have to go higher for longer than what optimistic market scenarios had priced in. WIRP suggests a 25 bp hike March 22 is nearly priced in, while another 25 bp hike May 3 is nearly 70% priced in and rising over 90% June 14. If we do get that second hike, which seems very likely, that would take the Fed Funds target range up to 5.0-5.25%, which is where the December Dot Plots put it by year-end. Updated Dot Plots and macro forecasts come at the next FOMC meeting March 21-22 and will be very important. Strangely enough, markets are still pricing in Fed easing in H2. Let that sink in. We probably won’t see peak Fed Funds until Q2 and yet folks are still looking for H2 rate cuts in what would be an extremely quick turnaround.

U.S. yields are finally showing some signs of life. The 2-year yield traded near 4.41% today, the highest since January 6 and on track to test that day’s high near 4.50%. A break above that would set up a test of the November cycle high near 4.80%. The 10-year yield traded near 3.61% today, the highest since January 11. A break above 3.68% is needed to set up a test of the December 30 high near 3.90%. However, there is still a long ways to go before it gets to the November high near 4.24% and the October high near 4.34%.

The dollar has gained but it’s not just from the Fed side. Both the ECB and BOE delivered disappointment along with their 50 bp hikes and despite some hawkish pushback (see below), markets are doubting their resolve to continue hiking rates. As a result, the 2-year yield differentials have started to move again in the dollar’s favor. Faithful readers will know that we have long felt that perceptions of a Fed pause or pivot were premature, while also believing that recent optimism regarding the U.K. and eurozone were overdone. As markets continue to reprice, we believe the dollar will continue carving out a near-term bottom.

Canada reports January Ivey PMI. This stood at 33.4 in December, which was clearly an outlier. Bank of Canada tightening expectations have collapsed after it announced a pause at its January 25 meeting, with the swaps market pricing in very low odds of another hike from the current 4.5%. Like the Fed, the market is pricing in an easing cycle from the BOC in H2, which we view as equally unlikely. Taken in conjunction with the more hawkish Fed, CAD is likely to suffer as a result. For USD/CAD, a break above 1.3525 would set up a test of the January 3 high near 1.3685.


ECB hawks are being very vocal. Holzmann said “Monetary policy must continue to show its teeth until we see a credible convergence to our inflation target.” Kazaks said “If the incoming data meets the ECB Council’s current expectations then the rates will be raised by 50 basis points in March.” Vasle said “With core inflation persisting at such high levels, it’s clear rates will have to be moved into a restrictive zone.” This chorus is clearly in response to President Lagarde’s rather equivocal message last week. WIRP suggests a 50 bp hike March 16 is about 85% priced in and that may be it for the super-sized hikes. Looking further ahead, a 25 bp hike May 4 is priced in followed by another one either June 15 or July 27 that would take the deposit rate up to 3.5%. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear last week. ECB speakers are plentiful this week and so expect the hawkish chorus to continue they try to assert their dominance of the narrative.

Eurozone reported soft December retail sales. Sales came in at -2.7% m/m vs. -2.5% expected and a revised 1.2% (was 0.8%) in November. As a result, the y/y rate came in at -2.8% vs. -2.7% expected and a revised -2.5% (was -2.8%) in November. Italy reports retail sales Wednesday and are expected at -0.8% m/m vs. 0.8% in November. While there has been some marginal improvement in the recent data, we simply cannot get too excited about the eurozone outlook.

Germany reported firm December factory orders. Orders came in at 3.2% m/m vs. 2.0% expected and a revised -4.4% (was-5.3%) in November. However, the y/y rate remained weak at -10.1% vs. a revised -10.2% (was -11.0%) in November. German IP will be reported Tuesday and is expected at -0.8% m/m vs. 0.2% in November. Elsewhere, Spain also reports IP Tuesday and is expected at 0.2% m/m vs. -0.7% in November. Italy reports IP Friday and is expected at 0.2% m/m vs. -0.3% in November. Eurozone IP won’t be reported until February 15.

BOE MPC member Mann remains hawkish. She said “The consequences of under tightening far outweigh, in my opinion, the alternative. We need to stay the course, and in my view the next step in bank rate is still more likely to be another hike than a cut or hold.” Mann has emerged as one of the leading hawks at the BOE, dissenting in December in favor of a larger 75 bp hike before moving back to the majority last week in voting for a 50 bp hike. She stressed that while the last couple of inflation prints suggest some stabilization, this is not yet a turning point in returning inflation back to the 2% target. BOE tightening expectations have fallen sharply, as WIRP suggests odds of a 25 bp hike March 23 are only around 80%. After that, the odds of a final 25 bp hike top out near 55% for June 22 and so the expected terminal rate is now closer to 4.25%, down from 4.5% at the start of last week and 6.25% after the disastrous mini-budget back in September. BOE speakers are plentiful this week but none are likely to sound as hawkish as Mann. Chief Economist Pill speaks later today and both he and Governor Bailey have tilted more dovish in recent comments.

The Swedish krona traded at its weakest since 2009. EUR/SEK traded near 11.4434, above the March 2020 high near 11.4262 and on track to test the March 2009 high near 11.7896. Weakness persists despite an expected 50 bp hike to 3.0% from the Riksbank when it meets this Thursday. NOK is also coming under pressure, with EUR/NOK trading at the highest since October 2020 near 11.0635. Indeed, NOK is the worst performing major YTD against both USD (-4.7%) and EUR (-5.1%), while SEK is the second worst at -1.3% and -1.4%, respectively. The Scandies can be viewed as global growth plays, similar to EM FX and the dollar bloc. As such, their recent weakness likely reflects the growing uneasiness with the global outlook.


Reports suggest the government will submit its nominations for the Bank of Japan posts to parliament next week. Earlier reports suggest that BOJ Deputy Governor Amamiya has been approached about the post of Governor to replace Kuroda as his term ends April 8. However, the government will also nominate two Deputy Governors to replace Amamiya and Wakatabe as both their 5-year terms end in March. Amamiya has been instrumental in helping Kuroda formulate and implement the BOJ’s massive monetary stimulus program and so his choice could imply tightening comes later rather than sooner. Former Deputy Governor Nakaso has emerged as the other frontrunner and is viewed as slightly more hawkish than Amamiya. That said, we believe the next Governor will have no choice but to begin removing accommodation this year.

Australia reported soft Q4 real retail sales. Sales came in at -0.2% q/q vs. -0.5% expected and a revised 0.3% (was 0.2%) in Q3. This is the first negative reading since Q3 2021 and suggests that Reserve Bank of Australia rate hikes are finally slowing the economy. The bank meets tomorrow and is expected to hike rates 25 bp to 3.35%. However, a handful of analysts polled by Bloomberg see no move. WIRP suggests over 80% odds of a 25 bp hike, while the swaps market is pricing in a peak policy rate near 3.75%, down from 3.90% at the start of last week. Given that inflation is still rising despite the 300 bp of tightening seen so far, we believe there are upside risks to the expected terminal rate. The bank then releases its Statement on Monetary Policy Friday, which will contain updated macro forecasts.

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