Dollar Firm as Bond Markets Continue to Stabilize

October 20, 2021
  • The Fed releases its Beige Book report for the November 2-3 FOMC meeting; U.S. fiscal stimulus continues to get pared back; Canada reports September CPI; markets have accelerated tightening expectations for the BOC
  • U.K. reported softer September CPI data; market pricing of BOE tightening remains elevated; Chief Economist Lane pushed back against market pricing for ECB tightening; Hungary delivered the expected 15 bp rate hike yesterday
  • Japan reported September trade data; PBOC left its Loan Prime Rates unchanged, as expected; yesterday’s launch of the Bitcoin futures ETF marked an important milestone for the industry

The dollar is firming as global bond markets stabilize. DXY is trading just below 94 after trading yesterday at the lowest level since September 28 near 93.52. USD/JPY traded at a new cycle high near 114.70 today as risk-on sentiment builds. The March 2017 high near 115.50 is up next, followed by the December 2016 high near 118.65. Elsewhere, the euro is trading just above $1.16, while sterling is trading lower as it was unable to sustain the move above $1.38. With the Fed ready to taper, markets pricing in Q3 or Q4 22 Fed liftoff, and price pressures still rising, we believe the move higher in U.S. rates and the dollar will eventually resume.


Global bond markets have calmed, at least for now. Global yields continue to stabilize after Monday’s panic moves. At the long end, 10-year yields are mostly lower, led by the U.K. (-3 bp) and Germany (-2 bp). The outliers are New Zealand (+4 bp), Australia (+9 bp), and Canada (+4 bp), while the U.S. is flat. At the short end, there was also a general move down in rates, led by the U.K. (-4 bp), and Germany (-2 bp) even as New Zealand, Australia, Canada, and the U.S. were all flat.

The Fed releases its Beige Book report for the November 2-3 FOMC meeting. Since the last FOMC meeting in September, there have been mixed signals from the labor market even as wages continue to edge higher. Supply chain issues continue to vex the economy, as demonstrated by the September IP data this week. In the previous Beige Book, most Fed districts said higher costs were being easily passed on to consumers. We expect this Beige Book to paint a mixed picture of the economy but this should not prevent imminent tapering.

Yet despite such efforts by the Fed to disentangle hikes from tapering, one naturally follows the other. With tapering set to end by mid-2022, that gives the Fed leeway to start lift-off as early as Q3 if conditions warrant. We’re talking about a year from now and a lot can happen in either direction. That said, the market remains confident of lift-off in Q3 22 as the Fed Funds futures strip suggests 80% odds, with lift-off fully priced in for Q4 22. Bostic, Kashkari, Evans, Bullard, and Quarles speak. Yesterday, Waller said the Fed should begin tapering next month and noted that it can shrink its balance sheet “quite quickly” if needed. However, Waller stressed that “I believe the pace of continued improvement in the labor market will be gradual, and I expect inflation will moderate, which means liftoff is still some time off.”

U.S. fiscal stimulus continues to get pared back. Latest reports suggest President Biden is now aiming for a price tag of around $2 trln for the “human infrastructure” bill, which is a bit lower than the $2.3-2.5 trln compromise that we expected. Senate Majority Leader Schumer said lawmakers are pushing for a “framework” on this compromise by the end of the week but we haven’t yet heard from the progressive wing of the Democrats, which has threatened to withhold support from the $550 bln traditional infrastructure bill if the compromise is too far below the original $3.5 trln proposal. Stay tuned.

Canada reports September CPI. Headline is expected to rise 4.3% y/y vs. 4.1% in August, while common core is expected to rise 1.9% y/y vs. 1.8% in August. If so, headline would be the highest since February 2003. August retail sales will be reported Friday. Headline is expected to rise 2.0% m/m vs. -0.6% in August, while sales ex-autos are expected to rise 2.6% m/m vs. -1.0% in July. Recall that there were 157.1k jobs created in September, including 193.6k full-time jobs. This should support consumption in Q4.

Like other central banks, markets have accelerated tightening expectations for the Bank of Canada. According to Bloomberg, the swaps market is pricing in 80 bp of tightening over the next year. This is at odds with current BOC forward guidance for lift-off in H2 22. Next meeting is October 27 and another round of tapering seems likely then as the economy continues to recover quite robustly. New macro forecasts will be released and will be watched closely for signs that lift-off may be moved up

As we had expected, the Brazilian Central Bank (BCB) is back in the FX markets to lean against BRL weakness from negative political headlines. This time it came from the fiscal side as wires suggest President Bolsonaro wants to extend the emergency aid program through 2022 and increase handout amount. Hard to see how this won’t blow off the spending cap, despite alleged attempts to make fiscal space for the new spending. Markets were unambiguous with the real down 0.5% against the dollar, the outliner among EM, despite the central bank $500 mln spot intervention. Rates are blowing out at the back end of the curve, up as much as 22 bp.


U.K. reported softer September CPI data. Both headline and CPIH inflation came in a tick lower than expected at 3.1% y/y and 2.9% y/y respectively. Both also slowed a tick from August and this should help alleviate some of the global inflation fears. However, most analysts expect inflation pressures to rise again in Q4 as supply chain issues persist. As such, the Bank of England still seems to be barreling towards an imminent rate hike.

Market pricing of Bank of England tightening remains heightened. After the 2-year gilt yield spiked to 0.75% Monday, it has drifted back to around 0.70% but is still nearly double the 0.38% yield at the start of October. The short sterling strip is still fully pricing in Q4 lift-off, followed by nearly four more hikes in 2022. WIRP suggests a hike at the November 4 meeting is about 80% priced in, followed by 55% odds of another hike at the December 16 meeting. Of note, the swaps market is pricing in 100 bp of tightening over the next year, according to Bloomberg.

Chief Economist Lane pushed back against market pricing for ECB tightening. The swaps market is pricing in 10 bp of tightening over the next year, according to Bloomberg. Lane noted “If you look at market pricing of the forward interest rate curve, I think it’s challenging to reconcile some of the market views with our pretty clear rate forward guidance.” He stressed that the medium-term outlook for inflation remains below the ECB’s target. Next policy meeting is October 28 and markets will be looking for clues as to the fate of QE which will likely be determined at the December meeting.

National Bank of Hungary delivered the expected 15 bp rate hike yesterday, bringing the base rate to 1.80%. The NBH’s hawkish credentials are well established as one of the first EM central banks to start tightening. The statement repeated most of their concerns including the risk of inflation becoming unanchored, suggesting that rates will continue rising at a 15 bp clip at least until the new inflation projections are out in December. Next policy meeting is November 16 and another 15 bp hike to 1.95% is expected.


Japan reported September trade data. Exports rose 13.0% y/y vs. 10.5% expected and 26.2% in August, while imports rose 38.6% y/y vs. 34.6% expected and 44.7% in August. This resulted in an adjusted deficit of -JPY624.8 bln and was the fourth straight month in the red. Yet Japan continues to run current account surpluses due to the strength of its overseas investment income. Export growth was the slowest since February and reflects in large part the global supply chain issues. The weaker yen should help competitiveness but the regional slowdown in trade and activity bears watching. Meanwhile, higher energy costs boosted imports.

The PBOC left its Loan Prime Rates unchanged as expected. The 1-year remained at 3.85% and the 5-year at 4.65%. The next step in monetary policy will likely come in the form of another reserve requirement rate cut, likely to the tune of 50 bp. That said, we don’t policymakers are in a huge hurry as local markets look a lot more stable at moment having digested the Evergrande fallout. Indeed, the Finance Ministry successfully issued a series of dollar-denominated bonds yesterday, with orders reaching nearly 6X the offer size. The yuan has resumed depreciating against the dollar after touching the strongest level since June yesterday. PBOC pushed back with an unusually weak fixing yesterday (-0.3% to RMB6.4069). Recent yuan gains have largely reflected strength in wider EM FX, but the strong dollar should eventually reassert itself. We think authorities desire a softer yuan for an extra boost to the economy.


Yesterday’s launch of the Bitcoin futures ETF marked an important milestone for the industry. The ProShares BITO ETF saw more than 24 mln shares traded with turnover of almost $1 bln, the second most heavily traded fund on record, according to Bloomberg. This will be an inefficient product in many ways, not only because of its nearly 1% expense ratio but because the typical contango of the Bitcoin futures curve will make the roll costly (though this could reverse during periods of backwardation). Still, BITO will provide retail investors with a convenient wrapper to gain crypto exposure and, perhaps more importantly, it greatly reduces the odds of more draconian regulation against the sector. In fact, the natural progression would be for the SEC to approve a spot ETF at some point – though this is far from assured. Bitcoin and Ethereum are both trading near all-time highs.

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