Dollar Gets Modest Traction Ahead of FOMC Minutes

May 19, 2021
  • Key FOMC minutes will be released; Canada reports April CPI; Banco de Mexico official signaled low likelihood of any more rate cuts
  • The ECB’s Financial Stability Review warned of rising risks to the eurozone; U.K. April CPI came in right at expectations; South Africa reported April CPI
  • The Australian government remains upbeat on the labor market; conflicting reports of an Iranian nuclear deal have led to volatile trading in oil; crypto markets are seeing continued fallout from Elon Musk’s comments and regulatory concerns in China

The dollar is getting some modest traction. DXY is up for the first day after three straight down day. It is flirting with the 90 level after earlier trading at a marginal new low for this move near 89.688. Despite today’s bounce, DXY seems likely to eventually test the January 6 low near 89.209. The euro made a new cycle high today and tested the February 25 high near $1.2245 but has fallen back to test $1.22. Sterling is back below $1.42 after a brief poke above but likely remains on track to test the February 24 high near $1.4235. USD/JPY is trading back above 109 after a brief spell below. With no major U.S. data this week, markets are likely to resume selling the dollar. The only possible game-changer are the FOMC minutes (see below).


Key FOMC minutes will be released. As our recent Fed piece here argues, the road to tapering will most likely begin with the minutes. We suspect Kaplan may have broached the subject of tapering at the April 27-28 FOMC meeting. The big question is whether any other Fed officials followed Kaplan’s lead, who has become the most ardent hawk at the FOMC. If there are any signs of a growing movement within the Fed to taper, this would likely push U.S. yields higher and give the dollar some more support. Bullard and Bostic speak and both are firmly in the dovish camp. Of note, the next FOMC meeting is June 16, when new Dot Plots and macro forecasts will be released.

Canada reports April CPI. Headline inflation is expected at 3.1% y/y vs. 2.2% in March, while common core is expected at 1.7% y/y vs. 1.5% in March. Last week, the Bank of Canada started to push back against currency strength. Governor Macklem said “If it moves a lot further that could have a material impact on our outlook and it’s something we’d have to take into account in our setting of monetary policy. If the dollar were to continue to move -- particularly if it’s not reflecting good developments for Canada -- that could become more of a headwind on our export projection.” Next policy meeting is June 9 and further jawboning is likely if the Loonie continues to gain. CAD has gained over 4% against USD since the BOC delivered a hawkish hold at the last policy meeting April 21, with USD/CAD trading yesterday at the lowest level since 2015 near 1.2015. Break below that would set up a test of the May 2015 low near 1.1920.

Banco de Mexico official signaled low likelihood of any more rate cuts. Deputy Governor Irene Espinosa said there’s no room for further easing interest rate cuts, and that the bank may eventually need to start withdrawing stimulus if inflation pressures remain elevated. The bank voted unanimously last week to keep rates steady 4%. Espinosa said the end to the easing cycle rate was positive as it means the bank is expecting an economic recovery, adding “We doubtless have to prepare ourselves for a global and local recovery process and that implies a change in the monetary policy vision.” Bloomberg consensus sees small odds of one more cut by early 2022, but it will all depend on whether the inflation trajectory improves. Next policy meeting is June 24 and no change is expected then.


The ECB’s Financial Stability Review warned of rising risks to the eurozone. The report linked those risks to financial stability to “remarkable exuberance” as bond yields rise during the pandemic recovery. The ECB is concerned that if there are more upward surprises in U.S. inflation, this would likely drive up eurozone bond yields without an accompanying improvement in the eurozone’s growth outlook. The report added that “spillovers from U.S. equity market repricing could be substantial. A 10% correction in U.S. equity markets could therefore lead to a significant tightening of euro-area financial conditions, similar to around a third of the tightening witnessed after the coronavirus shock in March 2020.” Lastly, the ECB noted that the uneven recovery from the pandemic means financial stability risks are likely to materialize in sectors and countries with higher pre-existing vulnerabilities.

These concerns are not really anything new. However, it does underscore our belief that the markets are getting too optimistic on the eurozone and too pessimistic on the U.S. And to the ECB’s point, the eurozone entered the pandemic in worse shape than the U.S. did in terms of deflationary risks and subpar growth. As it is, eurozone bond yields continue to creep higher and we know this is leading to quite a bit of angst at the ECB. The 10-year bund yield is trading around -0.09%, the highest since May 2019, while the 10-year BTP yield is trading around 1.15%, the highest since July 2020. The next ECB meeting June 10 will be a lively one if eurozone yields keep rising. While many want to slow PEPP purchases then, we are leaning towards an extension.

U.K. April CPI came in right at expectations. Headline inflation rose 1.5% y/y vs. 0.7% in March and CPIH rose 1.6% y/y vs. 1.0% in March. Markets and policymakers fully expect inflation to breach the BOE’s 2% target this year, with energy costs being one of the main drivers. This should start to fade later in the year, leaving the labor market as the main source of uncertainty. Indeed, Governor Bailey testified yesterday to the House of Lords economic affairs committee and said “We think inflation could go above target a bit temporarily later this year for these base effects.” So far, there are no threatening signs of a tighter labor market, even with the recovery in demand. There was little market reaction to the data with the pound and gilt yields little changed on the day. The short sterling futures strip shows that the first hike is mostly priced in by Q1 22 and fully priced in by Q3 22.

South Africa reported April CPI and March retail sales. Headline inflation accelerated a tick more than expected to 4.4% y/y from 3.2% in March. This is the highest since February 2020 but still (barely) in the bottom half of the 3-6% target range. Elsewhere, March retail sales came in very weak, plunging -3.7% m/m vs. -0.2% expected and +6.9% in February. This pulled the y/y rate down to -2.5% vs. 2.5% expected and a revised 2.2% (was 2.3%) in February. SARB meets tomorrow and is expected to keep rates steady at 3.5%. At the last meeting March 25, the bank delivered a hawkish hold. There were no longer any dissents in favor of a rate cut and the bank's model forecasted two 25 bp hike this year, in Q2 and Q4. South Africa is on the brink of a devastating third wave as all the country’s provinces are seeing a significant surge in infections. If this continues to worsen, President Ramaphosa will be forced to reimpose lockdowns and we think the central bank will be hard-pressed to deliver two rate hikes this year.


The Australian government remains upbeat on the labor market. Senior Treasury official Steven Kennedy noted that jobs lost from the end of the wage subsidy program are being absorbed by the labor market, but that the government had the fiscal space to respond if needed. Kennedy noted that when the JobKeeper program ended March 28, more than 1 mln workers were still receiving the subsidy, adding estimates show only 16k-40k recipients of the subsidy lost their jobs in the two weeks ended April 11. Lastly, he noted that “While there have been job losses associated with the end of the program, many of these workers appear to have found, or already had, other jobs and have benefited from the broader strength of the labor market. Early data appear to confirm that the employment losses associated with the end of JobKeeper won’t derail the broader labor market recovery.” He stressed that fiscal policy has played a large role in reducing the unemployment rate and this would continue with “additional stimulus from the current budget.” Of note, April jobs data will be reported tonight.


Conflicting reports of an Iranian nuclear deal have led to volatile trading in oil. Initially, the BBC quoted the BBC had quoted Russia’s representative at the UN’s International Atomic Energy Agency Mikhail Ulyanov as saying an “important announcement” would probably be made today. However, Ulyanov later said that while significant progress had been made, “unresolved issues still remain.” He added that “The negotiators need more time and efforts to finalize an agreement on restoration” of the Iran deal. Three unnamed European officials said they weren’t aware of any major announcements soon. However, Iran’s Deputy Foreign Minister Abbas Araghchi said “Good progress has been made on drafting the texts of the agreement. Some key issues remain that need further examination. We hope we can reach a conclusion on those issues in the next round of talks.” Of note, a joint commission of the Iran deal signatories meet for the next round of talks today in Vienna, after which the delegations return to their home countries for final consultations.

Crypto markets are seeing continued fallout from Elon Musk’s comments and regulatory concerns in China. The latter relates to a post by the PBOC’s from its Wechat account saying that financial and payments institutions are not allowed to price products or services with virtual currencies. Companies will also be banned from conducting virtual currency-related insurance business. This comes as crypto markets have been under heavy pressure from Elon Musk’s questioning of Bitcoin’s energy usage. Leaving aside the merits of this case, it’s undeniable that this high-profile debate provides a major setback for any institution looking to invest in the space, challenging one of the main pillars of the latest cycle. Bitcoin is down 7% and Ethereum is down 13% on the day. As always, it’s important to keep in perspective that, year to date, Bitcoin is still up 40% and Ethereum up 300%.

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