Dollar Firms as Key Week Begins

July 12, 2021
  • The central bank divergence story is likely to come back into focus this week; U.S. Treasury note and bond issuance picks up again; the U.S. growth outlook for Q2 remains strong; Peru left rates unchanged Friday but the changes in forward guidance suggest officials are getting ready to hike soon
  • ECB asset purchases for the week ending July 9 will be reported; ECB President Lagarde is flagging further easing of some sort; U.K. will fully reopen July 19 even as Prime Minister Johnson urges caution; the move comes at a tricky time in the pandemic as the delta variant spreads worldwide.
  • Japan reported firm data overnight; Bank Indonesia is taking its first baby steps into the hawkish spectrum

The dollar is staging a recovery this week. DXY is up today after two straight down days to end last week and further gains are likely due to the divergence story (see below). The euro remains heavy after the ECB’s dovish tilt (see below), while the uncertain U.K. outlook is likely to continue weighing on sterling. USD/JPY is the wild card. Does the yen continue to gain from a return of risk-off impulses? Or does is succumb to broad-base dollar strength. We believe we may have these answers and more as this important week unfolds.



The central bank divergence story is likely to come back into focus this week. ECB President Lagarde went full Draghi over the weekend (see below), while the BOJ decision Friday is likely to continue signaling no rate hike until at least FY24. Also this week, the BOC is likely to continue tapering and the RBNZ is likely to reaffirm its intent to hike rates in H2 2022. Australian labor market data should show continued improvement, supporting the RBA’s hawkish hold last week. Fed chair Powell testifies before Congress and is likely to confirm that tapering talks are ongoing.

This is a very important week for global markets. Was last Friday’s risk on backdrop for real? Or does risk off make a comeback? While the U.S. outlook continues to improve, it’s hard to ignore that many parts of the globe are going back into hard lockdowns as the delta variant spreads. U.K. data came in much softer than expected, underscoring just how difficult it is to fully recover from the pandemic even as it moves to fully reopen. This week, we see downside risks to mainland China data in light of the abrupt PBOC RRR cut last Friday. The U.S. reports June inflation and retail sales data this week. While U.S. readings have been softer of late, they still point to continued above-trend growth across most sectors. For now, we continue to believe that the U.S. economy stands to outperform in H2, which underscores are call for continued dollar gains.  

U.S. Treasury note and bond issuance picks up again. Treasury will auction coupon-bearing debt for the first time since June 24. Sales will be front-loaded with $58 ln and $38 bln of 3- and 10-year notes to be sold today, respectively. $24 bln of 30-year bonds will be sold tomorrow for a grand total of $120 bln. Keep an eye on the demand metrics. At the previous auctions, indirect bidders (the proxy for foreign demand) accounted for 54.2% for the 3-year, 65.0% for the 10-year, and 64.0% for the 30-year, while bid-to-cover ratios were 2.47, 2.58, and 2.29, respectively. Since June 25, the 10-year yield has fallen from 1.54% to 1.33%, while the 30-year yield has fallen from 2.18% to 1.96%. Kashkari speaks today and Wednesday.

The U.S. growth outlook for Q2 remains strong. The Atlanta Fed’s GDPNow model forecasts Q2 growth at 7.9% SAAR vs. 7.8% previously, while the New York Fed’s Nowcast model currently shows Q2 growth at a more modest 3.2% SAAR and Q3 growth at 3.8% SAAR vs. 3.9% previously. Of note, Bloomberg consensus sees 9.2% growth in Q2, easing to 7.1% in Q3 and 5.1% in Q4, all in SAAR terms. 

Peru’s central bank (BCRP) left rates unchanged at 0.25% last Friday, as expected, but the changes in forward guidance suggest officials are getting ready to hike soon. The most notable change was the removal of the qualifier “strong” when the discussing the need to maintain expansive policy – meaning that the current policy is not as necessary. This is in part a reaction to rising inflation expectations (at 2.6% as of June) and elevated core readings. BCRP is still sticking to its line of transitory supply-side inflation, but the updated communication suggests some concern. All in all, it looks like the bank is gearing up for a hike later this year, probably in early Q4. This should provide some (albeit short-term) support for PEN, which is still being weighed down by the disputed presidential election.


ECB asset purchases for the week ending July 9 will be reported. Net purchases were EUR15.7 bln for the week ending July 2 vs. EUR24.3 bln for the week ending June 25. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have clearly been a couple of outliers on both sides. The ECB is likely to be happy with the recent slump in eurozone yields, but they will maintain their aggressive asset purchases for now to ensure loose monetary conditions persist in H2.

 Indeed, ECB President Lagarde is flagging further easing of some sort. She said the upcoming July 22 ECB meeting will now have “some interesting variations and changes.” She added that “It’s going to be an important meeting. Given the persistence that we need to demonstrate to deliver on our commitment, forward guidance will certainly be revisited.” Lagarde also said that she expects the current EUR1.85 trln PEPP to run “at least” until March 2022 but that it could then be followed by a “transition into a new format” without elaborating further. Lastly, she said “We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months.”

Perhaps Madame Lagarde was addressing market disappointment with its rather timid strategy review. She is taking a page right out of Draghi’s playbook, which was to publicly stake out a dovish position in order to keep the hawks on the defensive. It’s clear from the divergence in tones between the ECB and the Fed that the two economies are very different situations. Like Japan, Switzerland, and Sweden, the eurozone was facing deflationary risks as it went into the pandemic and policymakers there realize that those risks remain in place and are acting accordingly. This shift in tone should keep a lid on any euro gains near-erm. Guindos speaks today and Schnabel speaks tomorrow and both should reflect Lagarde’s new dovishness.

The U.K. will fully reopen July 19 even as Prime Minister Johnson urges caution. The government will announce that the four criteria for reopening have been met, paving the way for the final stage of reopening to proceed next Monday. However, Johnson warned "Cases will rise as we unlock, so, as we confirm our plans today, our message will be clear. Caution is absolutely vital, and we must all take responsibility so we don't undo our progress, ensuring we continue to protect our NHS." Indeed, Health Minister Javid has already warned that daily cases could top 100k over the summer.

The move comes at a tricky time in the pandemic as the delta variant spreads worldwide. As a result, we suspect U.K. policymakers will remain cautious near-term. Indeed, the BOE has already pivoted at its last meeting June 24 as it warned against “premature tightening” due to its view that the spike in inflation is temporary. The bank reiterated then that it does not intend to hike rates until inflation has risen above the 2% target for a sustained period. Next BOE decision is August 5 and we expect a similarly cautious tone then.


Japan reported firm data overnight. May core machine orders jumped 7.8% m/m vs. 2.4% expected and 0.6% in April, while June machine tool orders jumped 96.6% y/y vs. 141.95 in May. Lastly, June PPI rose 5.0% y/y vs. 4.8% expected and a revised 5.1% (was 4.9%) in May. Still, it’s too early to sound the all clear for the economy. With the lockdowns persisting into Q3, the economic data are likely to remain soft near-term. BOJ decision later this week is expected to be a non-event, but updated forecasts should show weaker growth in FY21.

Bank Indonesia is taking its first baby steps into the hawkish spectrum. Governor Perry Warjiyo said the bank intends to gradually reduce accommodation “and then later, the end of next year, maybe some interest rate action.” This is obviously a very tentative signal, which we think is justified given the still unclear economic hit from the recent lockdowns. But it suggests that further easing is unlikely, and that the focus will remain on macroprudential measures and improving policy transmission into the real economy. BI recently cut its growth forecast for this year by nearly 1 ppt to a range of 3.7%-4.5%. We are also closely monitoring the participation of foreigners in the local bond markets to give us clues that investor appetite is returning, but we don’t see much of this yet.

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