Dollar Firm as U.S. Yields Rise

September 24, 2021
  • Markets are still digesting the Fed’s hawkish hold; U.S. 10-year yield traded today at the highest level since July 2 near 1.45%; with the FOMC meeting out of the way, Fed speakers become plentiful
  • German IFO business climate survey softened in September; BOE delivered a hawkish hold; Turkey unexpectedly cut rates 100 bp to 18.0%; South Africa left rates steady at 3.5%, as expected
  • Japan reported some key data; China remains a source of great uncertainty

The dollar goes into the weekend on a firm note. While down from the post-FOMC highs, we believe DXY remains on track to test the August 20 high near 93.729. The euro feels heavy after finding support this week just below $1.17 and remains on track to test of the August 20 low near $1.1665. Sterling was boosted by the hawkish hold from the BOE (see below) but is edging lower after the bounce ran out of steam near $1.3750. USD/JPY is trading at the highest level since August 11 near 110.55 and should test that day’s high near 110.80. We believe the hawkish Fed and ongoing China risks will help keep the dollar rally going.


Markets are still digesting the Fed’s hawkish hold. The dollar’s initial response was to move higher but reversed lower yesterday before reversing higher today. It’s not just the Fed, however, as global markets are being buffeted by several cross-currents of risk-off impulses. On that note, we go back to the dollar smile theory, which posits that at certain times, the dollar will gain from both good U.S. economic news as well as bouts of risk-off trading. This dynamic has been in play for much of the year and we see this continuing into year-end. We think there is a lot of noise out there but cutting through all of that, we find ourselves remaining dollar-positive. Let's wait a day or two to see how things shake out.

The U.S. 10-year yield traded today at the highest level since July 2 near 1.45%. It appears to be on track to test the June 25 high near 1.54%. The real 10-year yield is also higher and at -0.90% is the highest since July 1. If this rise in U.S. yields can be sustained, it is yet another dollar-positive factor to consider.

With the FOMC meeting out of the way, Fed speakers become plentiful. Mester, Powell, Clarida, Bowman, George, and Bostic all speak today. Tomorrow, Bullard delivers a policy paper at a conference hosted by the Swiss National Bank. We expect all Fed officials to continue laying the groundwork for an official tapering announcement at the November 2-3 FOMC meeting. August new home sales (1.0% m/m expected) will be reported today.


German IFO business climate survey softened in September. Headline reading came in at 98.8 vs. 99.0 expected and a revised 99.6 (was 99.4) in August. Expectations came in at 97.3 vs. 96.5 expected and a revised 97.8 (was 97.5) in August, while the current assessment came in at 100.4 vs. 101.8 expected and 101.4 in August. It’s not surprising to see German business sentiment soften after the September PMI readings this week showed larger than expected declines. While inflation across the eurozone remains elevated, we do not think the hawks at the ECB will prevail in the ongoing fight over future policy. As the data continue to soften, Madame Lagarde and the doves should remain in the driver’s seat.

The Bank of England delivered a hawkish hold. All policy settings were kept unchanged but the vote to maintain QE was 7-2, with Ramsden joining previous dissenter Saunders in voting to reduce it to GBP840 bln. The bank said that some recent developments strengthen the case for modest tightening, as most cost pressure indicators remain “elevated.” The bank noted that any tightening would be done with rate hikes. Overall, the message was much more hawkish than we expected. We don't like to second-guess central bank decisions but we think it is unwise for the BOE to tilt hawkish in light of all the negatives piling up for the UK economy.

Elsewhere, U.K. CBI released the results of its September distributive trades survey. Retailing reported sales came in at 11 vs. 34 expected and 60 in August, while total distributive reported sales fell to 21 vs. 45 in August. Earlier this week, CBI reported a firmed than expected industrial trends survey, with total orders at 22 vs. 16 expected and 18 in August. Here too, September PMI readings came in much softer than expected this week and point to growing headwinds for the economy.

Turkish central bank unexpectedly cut rates 100 bp to 18.0%. While there are always dovish risks in Turkey, this stands out as a particularly ill-advised move. USD/TRY made another new high today just above 8.86 and further losses seem likely in the coming days. The bank can continue to make tweaks to reserve requirements and such to help support the lira but really, the only thing that can turn the currency around is the return of foreign investors and that's not happening anytime soon. It used to be that TRY was the only EM currency offering carry but now we have BRL, MXN, and others taking rates significantly higher. Those come with a lot less baggage than TRY and so we think a lot of EM flows will go into these other currencies that have a better track record in terms of policy. With PPI surging 45.52% y/y in August, we think there is a real risk that inflation gets out of control. In lieu of rate hikes, Erdogan may try price controls but we all know that always ends badly.

South African Reserve Bank left rates steady at 3.5%, as expected. Forward guidance was unexpectedly hawkish, as the bank’s model still shows a 25 bp hike in Q4 followed by quarterly hikes over the course of 2022 and 2023. One could classify this as a hawkish hold but the problem here is that no one really believes SARB can hike rates that aggressively. SARB gave itself an out by saying future policy remains "data-dependent." The only policy meeting left this year is November 18 and we would be very surprised if it hikes then as its model suggests.


Japan reported some key data. August national CPI was mixed, as headline fell a tick to -0.4% y/y vs. -0.3% expected and core (ex-fresh food) was flat y/y, as expected. For targeted core inflation, this was the first non-negative reading since July 2020 but remains far below the 2% target. Preliminary September Markit PMI readings were also reported. Headline manufacturing came in at 51.2 vs. 52.7 in August, services came in at 47.4 vs. 42.9 in August, and the composite came in at 47.7 vs. 45.5 in August. Lastly, August supermarket and department store sales weakened sharply. The former fell -0.1% y/y vs. 4.6% in July, while the latter fell -11.7% y/y vs. 4.2% in August. This does not bode well for retail sales data out next Thursday.

China remains a source of great uncertainty. Evergrande has given no guidance on the $83.5 mln coupon payment due yesterday. There is a 30-day grace period before the dollar bond will be declared in default. While China’s default setting for its policymakers is opacity, we are hopeful that some guidance is given in the coming days. Elsewhere, reports suggests power rationing and outright cuts are widening due to official efforts to meet energy consumption targets that are meant to reduce carbon emissions. Curbs have been expanded to more than ten provinces, including the industrial hubs of Jiangsu, Zhejiang, and Guangdong. Lastly, the PBOC said all crypto-related currencies are illegal and must be banned. These include services provided by offshore exchanges to domestic residents.

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