Dollar Firm as Risk-Off Sentiment Returns

October 21, 2021
  • The Democrats may once again snatch defeat from the jaws of victory; Fed’s Beige Book report is worth discussing; regional Fed surveys will continue to roll out with Philly Fed reporting today; weekly jobless claims will be watched closely
  • U.K. posted solid budget numbers ahead of Chancellor Sunak’s budget next week; Bundesbank President Jens Weidmann announced his resignation; Turkey is expected to cut rates 100 bp to 17.0%.
  • Polls suggest the ruling LDP will limp to victory in general elections October 31; markets are testing the RBA; Korea external trade figures posted solid results for October; oil futures remain near 7-year highs due to signs of further tightening of inventories

The dollar is firming as some risk-off impulses take hold. DXY is trading modestly higher around 93.65 after two straight down days. USD/JPY is lower and testing the 114 area after trading yesterday at a new cycle high near 114.70. Elsewhere, the euro feels heavy as it trades just above $1.16, while sterling is lower and testing the $1.38 area after meeting stiff resistance near $1.3835 for the third straight day. 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 pick up steam again.


The Democrats may once again snatch defeat from the jaws of victory. Intra-party squabbling may end up killing President Biden’s economic agenda, with Senator Sinema now objecting to the corporate tax hike that had been proposed to help fund the spending. This comes after Senator Manchin objected to the clean power provisions, which may end up being a deal-breaker for the progressive wing if the green energy initiatives are eliminated or watered down. Our base case remains that some sort of compromise will be reached with a somewhat lower price tag, but we admit that our conviction is wavering with each day.

The Fed’s Beige Book report is worth discussing. It noted that the U.S. economy was growing at a “modest to moderate rate” even as some Fed districts noted slowing growth due to supply constraints and concerns over the delta variant. It noted that price increases were mostly driven by supply shortages, transportation bottlenecks, and labor constraints, and so “most Districts reported significantly elevated prices. Many firms raised selling prices indicating a greater ability to pass along cost increases to customers amid strong demand.” With regards to the labor market, the Fed noted “Firms reported high turnover, as workers left for other jobs or retired. Childcare issues and vaccine mandates were widely cited as contributing to the problem.” The report was based on information collected through October 8 and compiled by the Richmond Fed.

Regional Fed surveys will continue to roll out with Philly Fed reporting today. It is expected at 25.0 vs. 30.7 in September. Last week, the Empire survey came in at 19.8 vs. 25.0 expected and 34.3 in September. Markit preliminary October PMI readings will be reported tomorrow. Manufacturing PMI is expected at 60.5 vs. 60.7 in September, while services PMI is expected at 55.2 vs. 54.9 in September. September leading index (0.4% m/m expected) and existing home sales (3.6% m/m expected) will also be reported today.

Weekly jobless claims will be watched closely. That’s because the initial claims data are for the BLS survey week containing the 12th of the month. These are expected at 297k vs. 293k the previous week, which was a new pandemic low. Continuing claims are reported with a one-week lag and so next week’s reading will be more important. This week, they are expected at 2.548 mln vs. 2.593 mln the previous week, also a new pandemic low. Current consensus for October NFP is 380k vs. 194k in September, while unemployment is expected to drop a tick to 4.7%.


The U.K. posted some solid budget numbers ahead of Chancellor Sunak’s budget next week. September public sector net borrowing ex-banking came in at GBP21.8 bln vs. GBP22.6 bln expected, while August was revised down to GBP16.8 bln from GBP20.0 bln previously. For the April-September period, the total came in at GBP108.1 bln, nearly 30% below the GBP151.6 bln forecast back in March by the Office for Budget Responsibility. Revenues have come in stronger than expected due to the economic rebound. However, borrowing costs have risen and are likely to rise further. All eyes are on Sunak’s October 27 budget speech, in which he will have to perform a difficult tap dance in order to put the fiscal numbers on a sustainable path without choking off the recovery. As it is, the BOE looks set to tighten as soon as next month and so this double whammy will pose great risks to the 2022 outlook.

Bundesbank President Jens Weidmann announced his resignation. Citing personal reasons, he will step down at the end of the year and so it seems Weidmann will still participate in the December 16 decision on whether and how to extend QE. He reportedly does not have a new job lined up. In his resignation letter, Weidmann wrote that “A stability-oriented monetary policy will only be possible in the long run if the framework of the monetary union ensures the unity of action and liability, monetary policy respects its narrow mandate and does not get caught in the wake of fiscal policy or the financial markets.” Weidmann’s resignation comes as coalition talks between the SPD, Greens, and Free Democrats continue. If the new government can’t quickly agree on another candidate by the end of the year, Bundesbank Vice President Claudia Buch would step in as interim President. We can safely assume that Weidmann’s replacement at the Bundesbank will be equally hawkish and so there are no near-term policy implications.

Turkey central bank is expected to cut rates 100 bp to 17.0%. However, nearly half the analysts polled by Bloomberg see a smaller 50 or 75 bp cut. President Erdogan doubled down on his pressure for lower interest rates by firing three central bank officials last week, sending the lira to fresh record lows. These officials (two Deputy Governors and one MPC member) were against the decision to cut rates 100 bp to 18.0% at the last meeting September 23. After those sackings, a larger 100 bp rate cut today seems most likely now. The lira remains near record lows at TRY9.29, and we struggle to see any sustainable positive catalyst coming up.


Polls suggest the ruling LDP will limp to victory in general elections October 31. Large-scale Kyodo poll of around 175k people suggests the LDP will win at least 233 seats vs 276 currently. This alone would be a bare majority in the 465-seat Diet, but the LDP will also have the support of coalition partner Komeito. Other polls show support for the Kishida government at only 41%, down from 45% two weeks earlier. However, only 14% of respondents support opposition Constitutional Democratic Party leader Edano for Prime Minister vs. 54% for Kishida, with 58% saying the CDP was incapable of running the government.

Markets are testing the RBA. The yield on the targeted April 2024 government bond is trading around 0.15%, up 2 bp today and further above the 0.10% target. Like most other major central banks, market pricing for RBA tightening has intensified. According to Bloomberg, the swaps market is pricing in nearly 50 bp of tightening over the next year, which is at odds with the RBA’s forward guidance that lift-off is not expected until 2024 “at the earliest.” Next policy meeting is November 1 and it will be very important whether the RBA pushed back or validates market expectations for lift-off. RBA minutes out this week suggest the bank will maintain its guidance for 2024 lift-off.

Korea external trade figures posted solid results for October. Exports rose 36.1% y/y and imports 48.0% y/y, suggesting that the expected slowdown in demand from China and supply-chain disruptions have not yet materialized. Indeed, semiconductor exports rose 23.9% y/y and shipments to China increased by 30.9%. We think it’s just a matter of time until demand starts to slow, but for now the strong numbers will help justify the BOK’s continued hawkishness. There was little sustained price action from the data. Yields have stabilized over the last few sessions after a strong run-up since the middle of the year. Of note, the key JPY/KRW cross has fallen over 5% since mid-September, driven largely by the weaker yen.


Brent oil futures remain near 7-year highs due signs of further tightening of inventories. U.S. crude inventories posted a surprise draw of 431k barrels against forecasts for a build last week. On top of this, the inventory draw of gasoline was higher than expected. It appears we are seeing clear and sustained pressures for both the demand and supply sides. Of note, the backwardation continues to deepen, meeting that most of the action is happening in the front-month contracts. WTI is trading around $83 per barrel, the highest since late 2014 but still well below the June 2014 high near $107.75, while Brent is trading around $85 per barrel, the highest since 2018 and nearing the October 2018 high near $86.75.

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