Dollar Consolidates as Markets Await Fresh Drivers

November 18, 2021
  • Despite heightened tightening expectations across DM, the Fed outlook has remained remarkably stable; weekly jobless claims will be of interest; regional Fed manufacturing surveys for November will continue rolling out
  • Markets are finally heeding the ECB’s dovish message; Turkey delivered the 100 bp rate cut to 15.00% expected by most analysts; Hungary increased the one-week deposit rate from 1.8% to 2.5%, consistent with its hawkish message; South Africa is expected to hikes rates 25 bp to 3.75%
  • Reports suggest Prime Minister Kishida will unveil a bigger than expected fiscal package tomorrow; Indonesia kept rates on hold as expected, at 3.5%; Philippines kept rates on hold at 2.0% as expected; we are now seeing a strong drop in oil prices

The dollar is consolidating its recent gains. After trading yesterday at a new cycle high near 96.241, DXY is down two straight days and trading near 95.65. We look for further gains and the June 2020 high near 97.802 is coming into focus. Similarly, the euro traded at a new low yesterday near $1.1265 but has since recovered to trade near $1.1350. Here, the next major chart point is the June 2020 low near $1.1170. Sterling is holding up on firm U.K. data this week and trading near $1.35. Despite the support seen all week near $1.34, we believe it remains on track to test the December 2020 low near $1.3135. USD/JPY staged a big reversal and tested 114 today after trading just shy of 115 yesterday. The break above last month's high near 114.70 sets up a test of the December 2016 high near 118.65. We view this recent price action as corrective, as the fundamental backdrop continues to favor the dollar.


Despite heightened tightening expectations across Developed Markets, the Fed outlook has remained remarkably stable. Swaps market sees about 50 bp of tightening over the next twelve months and has not really deviated much from this in the past few weeks. The Fed is in an enviable position as it starts tapering this week, as it has the leeway to take a wait and see approach to actual rate hikes. Other central banks may be jumping the gun or overreacting, as we simply don’t know how the inflation dynamics will play out with this pandemic backdrop and broken supply chains. Over the next twelve months, swaps market sees 125 bp of tightening by BOC, over 100 bp by BOE, 100 bp by Norge Bank, 50 bp by Riksbank, 25 bp by SNB, 75 bp by RBA, and over 200 bp by RBNZ. Simply put, most of these are way too aggressive.

Weekly jobless claims will be of interest. That’s because initial claims data will be for the BLS survey week containing the 12th of the month. These are expected at 260k vs. 267k the previous week. Continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. These are expected at 2.12 mln vs. 2.16 mln the previous week. September JOLTS data last Friday support the notion that lack of stronger hiring is still a labor supply problem, not demand. Current consensus for November NFP is 490k vs. 531k in October, with the unemployment rate expected to fall a tick to 4.5%.

Regional Fed manufacturing surveys for November will continue rolling out. Both Philly Fed and Kansas City Fed report and are expected at 24.0 and 28 vs. 23.8 and 31 in October, respectively. Earlier this week, Empire survey came in at 30.9 vs. 22.0 expected and 19.8 in October, with the employment component rising 26.0 vs. 17.1 in October and prices received rising to 50.8 vs. 43.5 in October. That was the first reading for November and suggests that despite supply chain issues, the US manufacturing sector remains strong. Leading index (0.8% m/m expected) will also be reported today, while the Fed’s Bostic, Williams, Evans, and Daly speak.


Markets are finally heeding the ECB’s dovish message. Swaps market is now pricing in only 7 bp of tightening over the next twelve months, well below the 20-25 bp that was priced in after the October 28 ECB decision. Madame Lagarde and most of her colleagues have been stressing that a 2022 hike is highly unlikely, and we concur. Next ECB meeting December 16 should see some sort of extension of QE, as the risks of removing accommodation are rising significantly. That meeting will bring fresh macro forecasts that include 2024 for the first time, and should send a clear signal that a 2023 hike is also unlikely. We suspect the 2022 inflation forecast could be tweaked higher but 2023 and 2024 forecasts should show that the bank does not see sustainably high inflation. Centeno, Panetta, and Lane speak today.

Turkey’s central bank delivered the 100 bp rate cut to 15.00% expected by most analysts. While we think the easing cycle is a clear policy mistake, we welcome the fact that they did not double down with a more aggressive cut. Furthermore, the bank said that it would assess ending rate cuts in December, which makes the December 16 meeting even more important. CPI rose 19.89% y/y in October, the highest since January 2019 and further above the 3-7% target range. With the lira down nearly -11% month to date, another big jump in inflation is expected. The bank surprised markets by starting the easing cycle with a 100 bp cut in September, then followed up with a dovish surprise 200 bp cut in October. The lira weakened some 1% after the decision, suggesting that some investors were hoping for a more conservative move.

Hungary’s central bank increased the one-week deposit rate from 1.8% to 2.5%, consistent with its hawkish message. Today’s move follows the decision to hike the benchmark rate by 30 bp to 2.1%. The deposit rate will tempt corporates to park more cash at the bank’s facility. In addition, the bank plans to end the liquidity injection program via swaps and cut its weekly purchase of government bonds from HUF32 bln to HUF18bln. That said, its tightening cycle so far has been fairly timid given that CPI inflation came in at 6.5% y/y in October, the highest since September 2012 and well above the 2-4% target range.

South African Reserve Bank is expected to hikes rates 25 bp to 3.75%. However, the market is split as nearly half the 21 analysts polled by Bloomberg see steady rates. South Africa reported October CPI yesterday, with both headline and core inflation remaining steady as expected at 5.0% y/y and 3.2% y/y, respectively, with headline remaining in the upper half of the 3-6% target range. The bank’s model shows a 25 bp hike this year, followed by quarterly 25 bp hikes in both 2022 and 2023. This seems overly aggressive and we believe such an outcome would endanger the optimistic targets set forth in last week’s medium-term budget statement.


Reports suggest Prime Minister Kishida will unveil a bigger than expected fiscal package tomorrow. After earlier reports of a package somewhere north of JPY40 trln, the latest reports suggest something almost twice as large at JPY78.9 trln. Actual stimulus is pegged to be around JPY55.7 trln, which would eclipse both of the two pandemic related fiscal packages last year. Japan’s economy is coming off of a Q3 contraction and data suggest Q4 is getting off to a sluggish start, and so it’s clear that Kishida is taking no chances. With another slug of fiscal stimulus coming down the pike, the Bank of Japan will simply sit back and maintain its current accommodative policy for the time being. Next policy meeting is December 16-17 and no change is expected then.

Bank Indonesia also kept rates on hold as expected, at 3.5%. The bank left its inflation forecast unchanged at 2-4% for this year and the next, though inflation is currently below the target. The bank will likely stay on hold while retaining its “pro-growth stance” even as the recovery gathers pace, thanks to subdued pressures. The currency can still be a factor in the BI decision to bring forward it’s tightening cycle, but for now, we don’t see any change until later in 2022. Bloomberg consensus sees no change in H1 and one hike by end-2022. There was no notable price action following the decision.

The Philippines’ central bank kept rates on hold at 2.0% as expected. The bank reduced its inflation forecast slightly to an average of 4.3% for the year. This is still above the 2-4% target range, but officials expect inflation to converge next year as transitory factors begin to fade. Growth surprised on the upside for Q3 so there is no pressure to provide further accommodation, as confirmed by Governor Diokno’s characterization of the recovery as “gaining solid traction.” There was no notable price action following the decision. The risks seem roughly balanced for the bank at the moment, so we don’t expect any move until later in 2022. Bloomberg consensus sees no change in H1 and one hike by end-2022.


Never a boring time in the commodity space; after yesterday’s spike in natural gas prices, we are now seeing a strong drop in oil futures. The former was led by increased geopolitical tensions relating to gas supplies from Russia after Germany halted approval of the Nord Stream 2 pipeline. Netherland’s Natural Gas contract is up 390% this year, but yesterday’s spike was not enough to bring it back to October highs. Crude oil is down about 4.5% over the last two sessions, with WTI breaking below the $80 per barrel level. The driving story here is the potentially coordinated move by the U.S. and China to tap their strategic oil reserves.

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