Dollar Firm Ahead of Key U.S. Data

June 03, 2021
  • ADP reports private sector jobs data; ISM services PMI will be very important; weekly jobless claims data will be watched closely; the Fed was upbeat in its Beige Book report for the upcoming June 15-16 FOMC meeting.
  • Eurozone reported final May services and composite PMI readings; Russia announced it will eliminate its dollar holdings from its National Wellbeing Fund; Turkey reported May CPI
  • Japan reported final May services and composite PMI readings; Australia reported final April trade and retail sales data; Caixin reported its services and composite PMIs for May

The dollar is firm ahead of key U.S. data today. DXY is up for the third straight day and trading back above 90, while the euro is trading back below $1.22 and sterling is trading just below $1.42. USD/JPY is trading just below 110 and is likely to test last week’s high near 110.20, which was the highest level since April 6. While we believe the fundamental story favors the dollar, there is a lot of ground recover in the coming days. Until we see higher U.S. rates (both real and nominal), the greenback is likely to remain vulnerable to further bouts of selling. The 10-year yield remains stuck around 1.60% currently, while the breakeven inflation rate has edged higher to around 2.45%, keeping the real rate around -0.85%.

AMERICAS

ADP reports private sector jobs data today. It is expected at +650k vs +742k in April. This and the ISM services PIM (see below) will be the final clues for May jobs data tomorrow, where consensus currently sees 655k jobs added vs. 266k in April, with the unemployment expected to fall two ticks to 5.9%, a new cycle low. Both initial and continuing claims fell in the BLS survey week containing the 12th of the month, which suggests a solid May NFP number. As one can see from last month, the ADP and NFP don’t always line up. However, most are looking for a snapback in NFP from the big April miss.

ISM services PMI will be very important. Recall that the composite Markit PMI rose to 68.1 from 63.5 in April, driven largely by a huge jump in services to 70.1 from 64.7 in April. Also, Chicago PMI surged to 75.2 vs. 68.0 expected and 72.1 in April. All these strong readings put upside risks to today's ISM reading, which is expected to rise to 63.2 from 62.7 in April. Keep an eye on the employment and prices paid components.

Weekly jobless claims data will be watched closely. Initial claims are expected at 387k vs. 406k last week, while continuing claims are expected 3.614 mln vs. 3.642 mln last week. Both of those readings last week were new lows for the pandemic, and the ongoing drop in clams point to a solid NFP number Friday. It’s clear from the April jobs report that the improvement in the U.S. labor market has entered into an uneven and unpredictable phase, but a 655k gain would go a long way in reassuring markets that the U.S. recovery remains intact. April challenger job cuts will also be reported today.

The Fed was upbeat in its Beige Book report for the upcoming June 15-16 FOMC meeting. It noted that “The national economy expanded at a moderate pace from early April to late May, a somewhat faster rate than the prior reporting period. Overall price pressures increased further since the last report. Selling prices increased moderately, while input costs rose more briskly.” This Beige Book report was based on information collected by the 12 regional Fed banks for the period up to May 25 and compiled by the Cleveland Fed. Of note, it reported that “Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months.” Is this transitory or something more? This inflation debate will likely dominate the discussions at this meeting, with many officials likely pushing to start tapering discussions in case this isn’t transitory.

For those keeping score at home, we now have Kaplan, Harker, Barkin, Clarida, Quarles, and Bullard advocating for tapering discussions to start. Recall that in the March 16-17 Dot Plots, four FOMC members saw the first hike in 2022. The June 15-16 Dot Plots will be very interesting, and we suspect that more than four will see the first hike coming in 2022. Bostic, Kaplan, Harker, and Quarles speak today. Chair Powell wraps things up with an appearance tomorrow. Then at midnight, the media embargo goes into effect and there will be no Fed speakers until Powell’s post-decision press conference the afternoon of June 16.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported final May services and composite PMI readings. Services PMI rose to 55.2 vs. 55.1 preliminary, which pulled the composite PMI up to 57.1 from 56.9 preliminary. German and French composite readings remained unchanged from the preliminary ones at 56.2 and 57.0, respectively. However, Spain and Italy were reported for the first time and their composite PMIs picked up significantly from April to 59.2 and 55.7, respectively. Elsewhere, the U.K. reported final May services and composite PMI readings. Services PMI rose to 62.9 vs. 61.8 preliminary, which pulled the composite PMI up to 62.9 from 62.0 preliminary. Vaccinations and reopening should continue to boost European growth but we remain skeptical that the divergences with the U.S. will narrow as much as markets are expecting.

Russia announced it will eliminate its dollar holdings from its National Wellbeing Fund. Finance Minister Anton Siluanov said it would instead shifting to euros, yuan, and gold,. The fund currently holds 35% of its liquid assets in USD (about $41.5 bln), with a similar share in EUR and the rest spread across CNY, JPY, GBP, and gold. Siluanov said that after the shift, 40% will be held in EUR, 30% in CNY, 5% each in JPY and GBP, and 20% in gold. Of note, the Wellbeing fund reportedly has around $120 bln in liquid assets and around $185 bln of total assets. Russia has steadily reduced its holdings of dollars over the past several years, and Siluanov said “We can make this change rather quickly, within a month.”

We stress that the move should not be seen as a loss of confidence in the dollar. Rather, Russia is simply seeking to reduce its exposure to U.S. assets amidst the ongoing threat of sanctions. Yet given that its biggest export oil is invoiced in dollars, it will be difficult to eliminate all exposure. The most recent IMF COFER data for Q4 2020 shows that 59% of global foreign exchange reserves are held in USD, 21% in EUR, 6% in JPY, 5% in GBP, and 2% in CNY. Q1 2021 data will be reported at the end of this month and the dollar share is likely to rise purely from valuation effects as the dollar rallied sharply last quarter.

Turkey reported May CPI. Inflation unexpectedly slowed to 16.59% y/y vs. 7.25% expected and 17.14% in April. This is the first deceleration since September but inflation remains far above the 3-7% target range. Yesterday, central bank Governor Kavcioglu tried to calm markets, calling premature easing fears “unjust.” There is still very low confidence in policymaking and now the lower inflation print muddies the outlook even more after President Erdogan this week explicitly called for lower interest rates in either July or August. Next central bank meetings are June 17, July 14, and August 12. In this environment, a cut at any of these meetings would invite further lira weakness. After trading as high as 8.80 after the comments, USD/TRY has fallen back to trade near 8.63 currently. Further losses appear likely until the monetary policy regime is unequivocally repaired.

ASIA

Japan reported final May services and composite PMI readings. Services PMI rose to 46.5 vs. 45.7 preliminary, which pulled the composite PMI up to 48.8 from 48.1 preliminary. Markets should not get too excited about this, as the lockdowns stretch into June and there are growing downside risks for the economy in Q2. Above all, the poor fundamental outlook should keep the yen on its back foot. USD/JPY is trading just below 110 but we think it’s only a matter of time until we see an upside breakout in this pair. The May high near 110.20 is close and after that is the March high near 111.

Australia reported final April trade and retail sales data. Services PMI fell to 58.0 vs. 58.2 preliminary, which pulled the composite PMI down to 58.0 from 58.1 preliminary. Exports rose 3% m/m vs. 7% expected, while imports fell -3% m/m, as expected. Sales rose 1.1% m/m, as expected. With the recovery in place, the outlook for RBA policy has become more complicated. The RBA will decide at its July 6 meeting whether to extend QE by shifting its targeted 3-year bond to the one maturing November 2024 from the current April 2024 bond. This week’s meeting was simply a placeholder and offered few clues as to what will happen next month. With BOC and BOE already tapering and Norges Bank and RBNZ offering hawkish rate paths, speculation is growing that the RBA will follow suit.

Caixin reported its services and composite PMIs for May. Services PMI slipped to 55.1 vs. 56.2 expected and 56.3 in April, which pulled the composite PMI down to 53.8 from 54.7 in April. This runs counter to the official PMI readings earlier this week, where the non-manufacturing PMI rose to 55.2 from 54.9 in April and the composite PMI rose to 54.2 from 53.8 in April. Overall, we believe the recovery continues but there are downside risks as policymakers continue to rebalance, deleverage, and regulate. After the PBOC’s shot across the bow, CNY has weakened every day this week. This despite broad-based gains in EM FX, with MSCI EM FX rising to an all-time high today.

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