Dollar Firm Ahead of CPI Data

July 13, 2021
  • U.S. inflation readings will come into focus; we believe that the continued low rate environment will give the Fed more confidence to taper; U.S. Treasury issuance continues
  • Details of ECB asset purchases for the week ending July 9 will be reported; analysts are left pondering what the ECB might do at the July 22 meeting after Lagarde’s bombshell announcement; Czech Republic reported softer June CPI; social unrest in South Africa got worse yesterday but seems to have subsided this morning
  • Japan Prime Minister Suga’s support slid to a record low; Australia June NAB business survey was soft; RBNZ meets tomorrow and is expected to keep rates steady at 0.25%; China’s June trade figures surprised materially on the upside

The dollar continues to gain traction ahead of CPI data. DXY is up for the second straight day after two straight down days to end last week and has recouped nearly half of its losses from the July 7 peak near 92.845. A break above 92.554 is needed to set up a test of that high. The euro remains heavy after the ECB’s dovish tilt and a break below $1.1820 is needed to set up a test of the July 7 low near $1.1780. Sterling is holding up a bit better but we think growing concerns about the reopening will eventually push it lower to the July 8 low near $1.3740. USD/JPY remains bid above 110 but is still subject to downside risks if market sentiment tumbles again.


U.S. inflation readings will come into focus. CPI will be reported first today. Headline inflation is expected to fall a tick to 4.9% y/y, while core inflation is expected to pick up a couple of ticks to 4.0% y/y. If so, the core reading would be the highest since December 1991. This will be followed by PPI data tomorrow, where headline inflation is expected to rise a tick to 6.7% y/y and core inflation is expected to pick up three ticks to 5.1% y/y. Yet inflation expectations remain low, with the 10-yrear breakeven rate around 2.33% and the 30-year breakeven rate around 2.27%, both down from the May peaks of 2.59% and 2.41%, respectively. June budget statement will also be released today, where a deficit of -$192 bln is expected.

We believe that the continued low rate environment will give the Fed more confidence to taper. For now, a taper tantrum has been avoided despite clear signals that tapering is likely coming sooner rather than later. Bullard yesterday said "I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures." We concur. However, not all on the FOMC feel the same way yet. Regarding tapering, Barkin said "if the labor market can clear relatively quickly, then maybe it can happen sooner, but if it takes longer for the labor market to reopen, it goes a little later." The debate is ongoing and so we do not expect anything concrete to emerge from the July 27-28 FOMC meeting. Taper talk will continue and perhaps make it into the official statement. However, any timetable is unlikely to be unveiled until either the August Jackson Hole Symposium or the September 21-22 FOMC meeting.

U.S. Treasury issuance continues. Treasury will auction $24 bln of 30-year bonds today. Keep an eye on the demand metrics. At the previous auctions, indirect bidders (the proxy for foreign demand) accounted for 64.0% and the bid-to-cover ratio was 2.29, respectively. Yesterday’s auctions saw solid demand. A total of $58 bln and $38 bln of 3- and 10-year notes were sold. Indirect bidders took 53.2% vs. 54.2% previously for the 3-year and took 63.5% vs. 65.0% previously for the 10-year. Bid-to-cover ratios were 2.41 vs. 2.47 previously and 2.39 vs. 2.58 previously for the two issues, respectively. It appears investor appetite for USTs remains healthy even though yields are materially lower than the last auctions in late June.


Details of ECB asset purchases for the week ending July 9 will be reported. Net purchases were reported yesterday at EUR22.1 bln vs. EUR15.7 bln for the week ending July 2 and EUR24.3 bln for the week ending June 25. Redemptions and gross purchases will be reported today. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have clearly been a couple of outliers on both sides. PEPP is still due to end March 2022, though it’s clear that further stimulus is of some sort is in the pipeline.

Analysts are left pondering what the ECB might do at the July 22 meeting after Lagarde’s bombshell announcement. We suspect many at the ECB are in the same boat. We will be writing a preview early next week but suffice to say that risks are high that the forward guidance will be materially altered and further stimulus is likely to be announced for 2022, when the current PEPP is scheduled to end. The strategy review was relatively tame, but has offered Madame Lagarde’s an opportunity for her “whatever it takes” moment. Of course, one by-product of a more dovish ECB is a weaker euro and that is not lost on either Lagarde or the markets.

Czech Republic reported softer June CPI. Inflation eased to 2.8% y/y vs. 2.9% in May and is the second straight month of deceleration, moving back within the 1-3% target range. At the last meeting June 23, the Czech National Bank started the tightening cycle and delivered the expected 25 bp hike to 0.5%. Governor Rusnok said then that rates will continue rising in H2 and warned that hikes are possible at “every coming meeting” even as he hoped that wouldn’t be necessary. Bloomberg consensus sees the policy rate at 0.75% by year-end, rising to 1.5% by end-2022. Next policy meeting is August 5 and no change is likely so soon in light of the modestly improved CPI data.

The social unrest in South Africa got worse yesterday but seems to have subsided this morning. The riots were ostensibly triggered by the imprisonment of former President Jacob Zuma, but it was surely also motivated by extended lockdowns that have taken a toll on the economy and the social fabric. Violence spread to a few regions, with looting and trade routes shutting down. The army has been deployed and reports from early this morning suggests it seems to have helped. Still, this event can’t be too surprising given the country’s fragile starting point going into the pandemic with a weak economic backdrop, chronically high unemployment, and a politically divided population. The rand has depreciated about 1.5% against the dollar this week.


Japan Prime Minister Suga’s support slid to a record low days ahead of the Olympics. NHK poll shows 33% support Suga’s cabinet, down 4 ppt from the previous month. The poll was taken between July 9-11. A separate Yomiuri poll shows 37% support for Suga, with only 28% support in Tokyo, where half of the respondents said the games should be canceled. This pretty much erases the modest gains that Suga has made in recent months. He first faces a leadership vote in the Liberal Democratic Party in September. A general election must then be held before late October. As we have written countless times, his falling popularity should lead to another fiscal package over the summer.

Australia June NAB business survey was soft. Business conditions fell to 24 from a revised 36 (was 37) in May, while business confidence fell to 11 from 20 in May. July Westpac consumer confidence will be reported tomorrow. Renewed lockdowns that began in June and are stretching into July are likely to hurt business sentiment further. No wonder the government just pledged additional financial support for firms and households, including up to AUD10k a week to businesses that have lost more than 30% of revenue. The increased support will be given whenever lockdowns enter a fourth week in any state or territory. The delta variant continues to spread in Sydney and so the lockdown is likely to be maintained for most of this month.

RBNZ meets tomorrow and is expected to keep rates steady at 0.25%. However, there are growing calls that the RBNZ will move forward lift-off expectations this week. Can it deliver two hawkish surprises in a row? At the last meeting May 26, the bank caught markets off guard by projecting the first rate hike in H2 2022. The bank saw the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period. Of note, there will not be any new forecasts or projections until the August 18 meeting. The four biggest Kiwi banks now look for RBNZ to hint at lift-off by end-2021. NZD tends to gain on RBNZ decision days. It has gained the last four straight and eight of the past nine dating back to March 2020.

China’s June trade figures surprised materially on the upside. Exports rose 32.2% y/y vs. 23.0% expected and 27.9% in May, while imports rose 36.7% y/y vs. 29.5% expected and 51.1% in May. The trade balance rose to $51.5 bln, the third month above its 5-year average. The upturn in exports came in part from the textiles and medical equipment sectors, along with the usual demand from work-from-home goods. Raw materials accounted for much of the surprise on the import side. This should allay any concerns that China’s latest easing move (the 50 bp RRR cut) was meant to preempt a much-deeper-than-expected economic slowdown. Indeed, a PBOC official said overnight that the cut should be seen as a “standard liquidity operation.” June retail sales, IP, and Q2 GDP will be reported Thursday.

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