Dollar Firm in Quiet Start to the New Year

January 03, 2022
  • Looking back to 2021, the dollar had a stellar year; we believe the strong dollar trend remains intact for 2022; with a busy U.S. data week ahead, there are only minor data today
  • Eurozone final December manufacturing PMI readings were reported; U.K. markets are closed but Prime Minister Johnson will return tomorrow to some bad news; Turkey reported much higher than expected December CPI data; Israel central bank is expected to keep rates on hold at 0.10%.
  • The Asian session was relatively quiet as Japan, Australia, and New Zealand were all on holiday; Singapore reported firm advance Q4 GDP data

The dollar remains rangebound as many markets remain on holiday. DXY is up modestly and trading just below 96. This is smack in the middle of the 95-97 trading range that has largely held since mid-November. The euro feels heavy after failing to break above $1.14 last week, while sterling’s bounce ran out of steam near $1.3550 as BOE tightening expectations fell back a bit. USD/JPY traded at the highest level since November 26 near 115.35 today but has since fallen back to 115. Looking ahead to an eventful January, we believe the underlying trend for a stronger dollar remains intact. U.S. rates are already moving back in the dollar’s favor, with the 2-yar yield staring the new year at a new cycle high near 0.76%.


Looking back to 2021, the dollar had a stellar year. Amongst the majors, only CAD was able to eke out a small (0.7%) gain. GBP (-1%) and NOK (-2.7%) joined CAD at the top of the league table, while JPY (-10.3%), SEK (-9.1%), and EUR (-7%) were the worst performers. The central bank divergence theme should continue to drive currency markets this year, with divergences expected along the lines of monetary policy.

We believe the strong dollar trend remains intact for 2022. The U.S. economy remains poised to outperform in 2022, which in turn will give the Fed greater confidence in normalizing policy over the course of the year. This stands in stark contrast to the ECB and BOJ, both of which are nowhere close to hiking rates. While three Fed hikes are priced in, we believe markets are underestimating the Fed’s capacity to tighten. Swaps market sees the terminal Fed Funds rate at 1.5%, which history suggests is much too low. Lastly, the removal of global monetary accommodation is the major reason we remain negative on EM. This asset class thrives on cheap and abundant global liquidity and it’s clear that there will be less and less of that as we move through 2022.

With a busy U.S. data week ahead, there are only minor data today. November construction spending (0.7% m/m expected) will be reported. There are no Fed speakers today. Of note, the Atlanta Fed’s GDPNow model is tracking 7.6% SAAR growth for Q4, up from 7.2% previously. This is a bit higher than Bloomberg consensus, which sees 6.0% SAAR growth in Q4 followed by 4.0% in Q1 and 3.6% in Q2. For now, the U.S. economy seems to be weathering the impact of omicron relatively well.


Eurozone final December manufacturing PMI readings were reported. Headline number was unchanged from the preliminary at 58.0. Germany fell to 57.4 vs. 57.9 preliminary, but this was offset by France rising to 55.6 vs. 54.9 preliminary. Italy and Spain were reported for the first time, with both falling nearly a full point from November to 62.0 and 56.2, respectively. Final services and composite PMI readings will be reported Wednesday and are likely to show a larger negative impact from the resurgence in virus numbers. Of note, the eurozone last week reported weaker than expected M3 growth for November. It slowed to 7.3% y/y vs. 7.7% in October and was the slowest since March 2020. In other words, the boost to money growth from the ECB’s emergency pandemic measures has basically worn off already.

U.K. markets are closed but Prime Minister Johnson will return tomorrow to some bad news. Latest poll conducted by Deltapoll for the Daily Mail showed that the ruling Conservatives are way behind opposition Labour in the so-called “red wall” seats that traditionally vote Labour but flipped Conservative in the last election. More specifically, Labour had 49% support vs. 33% for Prime Minister Johnson’s Tories in all 57 of the seats that the Conservatives flipped in 2019. Deltapoll said the Tories would lose more than 100 seats if the poll results carried over to a general election. We suspect Chancellor Sunak will come under greater pressure not to tighten fiscal policy too much in the hopes of wooing back some support for the government. However, this is a double-edged sword as the poll also showed that Sunak was favored to become party leader should Johnson face a leadership challenge from within his party.

Turkey reported much higher than expected December CPI data. Headline inflation surged 36.08% y/y, nearly ten percentage points more than the expected 27.36% and well above the 21.31% posted in November. This is the highest since September 2002 and further above the 3-7% target range. What’s worse, PPI surged 79.89% y/y vs. 54.62%, which portends even higher CPI readings ahead. Next policy meeting is January 20 and rates are expected to remain steady at 14.0% after the central bank signaled an end to the easing cycle as it delivered the expected 100 bp cut to 14.0% at the December 16 meeting. Real rates remain deeply negative and so even a highly unlikely emergency rate hike of 25-30 percentage points would be unlikely to stabilize sentiment without external support from the IMF (also highly unlikely). Until that happens, the lira is likely to remain under pressure, subject to temporary bouts of strength when the central bank intervenes.

Israel central bank is expected to keep rates on hold at 0.10%. CPI rose 2.4% y/y in November, near the cycle high of 2.5% in September but still within the 1-3% target range. After announcing an end to QE at the October 7 meeting and flagging potential liftoff in 2022, the central bank left policy unchanged November 22 and said it would continue to intervene as needed to prevent shekel strength. Since that meeting, the shekel is basically flat, which is not bad given how the broader EM FX complex has weakened. For now, it’s steady as she goes for monetary policy but liftoff is likely by Q4.


The Asian session was relatively quiet as Japan, Australia, and New Zealand were all on holiday. All three will reopen to higher COVID case counts as the entire region starts to play catchup with Europe and North America. Tokyo and Okinawa are seeing the highest number of new cases since early fall, while the Australian state of New South Wales is posting record high numbers of new cases and hospitalizations. The Bank of Japan is not expected to hike rates anytime soon, but the RBNZ is in the middle of a tightening cycle and a hike February 23 by the RBNZ is fully priced in. Elsewhere, the RBA may start hiking this year but market conviction has waned. Liftoff at the June 7 meeting was nearly fully priced in back in mid-December but is currently close to 50/50.

Singapore reported firm advance Q4 GDP data. Growth came in at 2.6% q/q vs. 2.1% expected and a revised 1.2% (was 1.3%) in Q3. This put full year growth a tick higher than expected at 7.2% vs. -5.4% in 2020. This was the highest annual growth since 2010 and is a good sign for regional growth and activity. That said, policymakers have shifted their focus from boosting growth to taming inflation. Next MAS policy meeting is scheduled for April. While it may tighten again to follow up its October move, much will depend on omicron and how badly this latest wave impacts the growth outlook. Virus numbers are rising again and so policymakers may have to rethink the current open borders policy that allows quarantine-free travel for the vaccinated from certain countries.

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