Dollar Claws Back Recent Losses

May 04, 2021
  • U.S. data yesterday were mixed but still point to underlying strength in the economy; despite the PMI reading, the U.S. outlook remains stronger than ever; Fed speakers remain plentiful; COP is under heavy downward pressure on the back of negative political headlines
  • U.K. reported final April manufacturing PMI; ECB net asset purchases for the week ending April 30 were reported; Poland is expected to ratify the EU recovery fund today Central Bank of Russia releases its quarterly inflation report
  • Restrictions in Osaka may be extended; RBA delivered a dovish hold, as expected; March trade data were disappointing; Korea reported higher than expected April CPI

The dollar is clawing back some of its recent losses. After selling off yesterday, DXY is trading at a new high for this bounce near 91.391. The euro is once again testing support near $1.20, while sterling is holding up a bit better and trading just below $1.39. As a result, the EUR/GBP cross is trading at the lowest level since April 22. USD/JPY traded at the highest level since April 13 near 109.70 yesterday before falling back. A clean break of 109.65 is needed to set up a test of the March 31 high near 111. We continue to look for continued dollar strength on the strong economic outlook (see below) but this will require a more significant turnaround in U.S. yields.



U.S. data yesterday were mixed but still point to underlying strength in the economy. April ISM manufacturing PMI was somewhat disappointing. Headline came in at 60.7 vs. 65.0 expected and 64.7 in March. Prices paid rose to 89.6 vs. 86.0 expected and 85.6 in March, but employment fell to 55.1 from 59.6 in March and new orders fell to 64.3 from 68.0 in March. Elsewhere, auto sales were also reported yesterday and came in at an 18.51 mln annualized rate vs. 17.6 mln expected and 17.75 in March. This was the highest reading since July 2005 and suggests a strong retail sales number for the month. Consensus sees a 0.2% m/m gain in headline sales so there are clear upside risks.

Despite the PMI reading, the U.S. outlook remains stronger than ever. The Atlanta Fed’s GDPNow model updated its forecast for Q2 to an eye-popping 13.2% SAAR up from its initial 10.4% print. The New York Fed’s Nowcast model currently shows Q2 growth at a more modest 5.3% SAAR and won’t be updated until Friday. Of note, Bloomberg consensus sees 8.1% growth in Q2 and 7.0% in Q3 before easing to 4.7% in Q4, all in SAAR terms. Today, trade (-$74.3 bln expected) and factory orders (1.3% m/m expected) will be reported. Canada reports March building permits and trade.

Fed speakers remain plentiful. Today, it’s Daly and Kaplan. Kaplan is shaping up to be one of the least dovish at the Fed and we think he is the only one to admit to being one of the four "dots" that see a hike before end-2022. Of note, Kaplan is not a voter in either 2021 or 2022 but becomes one in 2023 and so his 2022 "dot" is a moot one. That said, we suspect more FOMC members will shift closer to Kaplan’s view in the coming weeks and this would be dollar-positive. Minutes to the April FOMC meeting come out May 19 and will be parsed for clues about tapering.

The Colombian peso is under heavy downward pressure on the back of negative political headlines. Finance Minister Carrasquilla resigned in the wake of street protests and was replaced by Commerce Minister Manuel Restrepo. These events followed a controversial tax plan intended to fund the pandemic stimulus expenditure by raising 1.4% of GDP in extra income. This would ensure the budget remains on a sustainable path, and hopefully avoid a downgrade. The government is now revising the plan and is likely to water down some of the most unpopular measures, such as extending the VAT to a larger set of goods. This raises the risk of downgrades to sub-investment grade, as per S&P’s recent warning. Colombia CDS prices continue to trend higher, now over 135 bp. This is at the top of the recent range and still well below that of Brazil (195 bp) and South Africa (220 bp). The peso depreciated 2.5% against the dollar yesterday.



U.K. reported final April manufacturing PMI. It rose a couple of ticks from the preliminary reading to 60.9. Services and composite PMIs will be reported Thursday, followed by construction PMI Friday. Data come as the Bank of England meets, with a decision due Thursday. Markets are somewhat split, with some looking for a tapering announcement this week and others looking for one at the next meeting June 24. Tapering was not mentioned at the last meeting March 18, and hasn’t really come up since the February 4 meeting, when Deputy Governor Ramsden broached the subject. It seems to us that tapering at this meeting would be a sudden shift from the dovish hold delivered and so we lean towards an announcement in June.

ECB net asset purchases for the week ending April 30 were reported. Net purchases were EUR19 bln, down from EUR22.25 bln for the week ending April 23 but up from a net EUR16.3 bln for the week ending April 16 and EUR17.1 bln for the week ending April 9. Redemptions for the week ending April 30 will be reported today and were EUR2.8 bln for the week ending April 23, leaving gross purchases at EUR25.0 bln that week vs. EUR28.4 bln the week ending April 16. The accelerated pace should be maintained until at least the June 10 meeting, when the ECB will likely reassess its program. If yields continue to rise, then the accelerated pace is likely to be extended into Q3, which would be a dovish sign.

Poland is expected to ratify the EU recovery fund today. A special session of parliament has been called in order to hold the vote. After weeks of wrangling within the ruling coalition, the government has reportedly won enough backing from the opposition to pass the plan. The ruling Law and Justice party agreed to demands from the Left party in exchange for its support. General elections aren’t due until 2023 but the split over the recovery fund bodes ill for the ruling coalition. Stay tuned.

Central Bank of Russia releases its quarterly inflation report. April CPI will be reported Friday. Headline inflation is expected at 5.6% y/y vs. 5.8% in March. If so, this would be the first deceleration since May 2020 but would remain well above the 4% target. The bank has delivered 75 bp of tightening so far and more is expected. Next policy meeting is June 11 and a 25 bp hike to 5.25% is expected. However, we see risks of a hawkish surprise.



Restrictions in Osaka may be extended. Governor Yoshimura indicated that he may seek an extension to its current coronavirus state of emergency due to the number of new cases and pressure on the hospital system. He noted that “My own awareness at this point is that it would be difficult to loosen or end the state of emergency.” The state of emergency covering Osaka and the neighboring prefectures of Hyogo and Kyoto as well as Tokyo began April 25 and is set to expire on May 11. Osaka officials will hold a meeting later this week after the end of the Golden Week holiday, at which time they will decide whether to ask the central government to extend the state of emergency. Expectations for a robust recovery in Q2 have been dashed by a widening pandemic and lagging vaccination program.

Reserve Bank of Australia delivered a dovish hold, as expected. All policy settings were left unchanged and the RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.” The bank revised up its 2021 and 2022 growth forecasts to 4.75% and 3.5%, respectively, and its inflation forecasts to 1.5% and 2.0%, respectively. Despite the upward revisions, officials remain concerned about slack in the labor market, with unemployment forecast at 5% at year-end and 4.5% at end-2022. The bank does not see risks of sustained wage inflation until unemployment is near 4%. The bank said it would decide at the July 6 meeting whether to extend Yield Curve Control and shift its target from the April 2024 bond to the November 2024 bond. The RBA’s Statement on Monetary Policy will be made Friday and will contain a full set of updated macro forecasts.

Elsewhere, March trade data were disappointing. Exports fell -2% m/m vs. +4% m/m expected and imports rose 4% m/m vs. 8% expected. AUD is underperforming on the day, down 0.5% against the dollar, but not far from the moves in other major currencies dragged lower by the broad dollar appreciation moved.

Korea reported higher than expected April CPI. Headline inflation came in at 2.3% y/y vs. 2.1% expected and 1.5% in March. This was the highest since August 2017 and above the 2% target. The increase in headline inflation was driven by energy, transportation, and still-elevated food items, but core inflation also accelerated by 0.4 ticks to 1.4% y/y. The central bank is sticking to the usual line of viewing the increase as temporary, implying no action needed. This seems fair to us, especially with the labor still lagging. Consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. Next central bank policy meeting is May 27 and rates are expected to remain steady at 0.5%. The won is underperforming on the day, down nearly 1% against the dollar.

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