Dollar Gets Some Traction Ahead of 20-Year UST Auction

April 21, 2021

US bond yields remain depressed ahead of a 20-year bond auction; BOC meeting ends with a decision this morning; ahead of the decision, Canada reports March CPI; BRL saw some relief yesterday after congress (finally) agreed on the budget
The E.U. recovery fund took a step closer to being implemented; latest polls from Germany show the rising popularity of the Greens at the expense of the ruling CDU/CSU; we got some more details of last week’s ECB asset purchases; U.K. reported March CPI
Japan reported firm March supermarket sales; New Zealand reported Q1 CPI; Korea reported strong trade data for the first 20 days of April

The dollar has gotten some modest traction.  After six straight down days, DXY is up for the second straight day.  DXY traded below 91 yesterday for the first time since March 4 but has since recovered to nearly 91.40.  Similarly, the euro traded at the highest level since March 3 near $1.2080 yesterday but has since fallen and is testing the $1.20 area.  Sterling traded above $1.40 yesterday for the first time since mid-March but the lack of any follow-through saw it fall back to trade near $1.39 today.  Lastly, USD/JPY remains heavy and traded at the lowest level since March 5 near 107.90 before popping back above 108. 


US bond yields remain depressed ahead of a 20-year bond auction.  The 10-year yield is currently around 1.57% today, down from yesterday’s high near 1.63% and only slightly above the 1.53% low posted last week.  Low US yields have done the dollar no favors so far in Q2.  We still like the dollar higher but this drop in U.S. yields from the 1.77% high on March 30 continues to weigh on the greenback.  Bond markets await results of $24 bln 20-year bond auction today.  At the last auction, indirect bidders took 61.4% and the bid-to-cover ratio was 2.51.  Tomorrow, there will be a $18 bln 5-year TIPS auction. 

The Bank of Canada meeting ends with a decision this morning.  Some expect it to begin tapering its asset purchases but we think it may be too soon and so a dovish surprise is very possible.  The policy rate will remain unchanged at 0.25% while updated macro forecasts will be presented in the quarterly monetary policy report.  Please see our preview here.  The Loonie tends to strengthen on BOC decision days.  Of the  12 dating back to the start of 2020, the currency has weakened on only three of them.

Ahead of the decision that day, Canada reports March CPI.  Headline inflation is expected to pick up to 2.3% y/y from 1.1% in February.  If so, it would be the highest since January 2020 but still within the 1-3% target range.  At the March meeting, the bank stressed that “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s January projection, this does not happen until into 2023.”  Of note, common core is expected to pick up only a tick to 1.4% y/y. 

The Brazilian real saw some relief yesterday after congress (finally) agreed on the budget. This is good news in the sense it shows the deadlock was broken, but there was no especially positive surprise in its content. The many open-ended aspects of the agreement mean we still don’t have a clear view as to how much the emergency Covid costs will rise above the budget. True to the script, local rates were broadly higher rising as much as 14 bps across the curve. This also led to price in some addition hikes over the coming months, beyond the 75 bps already assured for the May meeting. This lent some support for the real, which closed 0.3% weaker against the dollar, but outperformed most EM currencies.


The E.U. recovery fund took a step closer to being implemented.  Germany’s top court allowed parliamentary ratification of the proposed fund to proceed.  The process had been delayed back in March after political group Buendnis Buergerwille filed a suit claiming the E.U. shouldn’t be allowed to issue debt to finance its recovery fund.  This cannot happen until the underlying legislation has been ratified in all 27 member states.  In Germany’s case, that can now proceed but hurdles remain elsewhere.  Polish officials are now saying its parliament may delay the vote to ratify it until late June.  Reports suggest ruling party leader  Kaczynski is applying pressure on opposition parties to back the plan and with support still lacking, officials say the vote will definitely not happen before May 20.

Elsewhere, the latest polls from Germany show the rising popularity of the Greens at the expense of the ruling CDU/CSU.  The most recent poll by Forsa showed 28% backing the Greens, 21% backing the CDU/CSU, 13% backing the center-left Social Democrats (SPD), and 12% backing the liberal Free Democrats.  If this support is sustained, it could give the Greens the helm of Europe’s largest economy in September elections.  The poll was released on the day that the CDU/CSU power struggle ended with moderate Armin Laschet as its confirmed candidate.  Upcoming polls will reflect this choice and it’s probably going to get worse for the CDU/CSU as Laschet’s rival Markus Soeder enjoys much higher popular support.

We got some more details of last week’s ECB asset purchases.  Redemptions were a whopping EUR12.1 bln and so gross purchases were EUR28.4 bln, the largest since June 2020.  The ECB bought a net EUR16.3 bln last week vs. EUR17.1 bln the previous week.  Of note, eurozone yields have been creeping higher even as US yields have dropped.  The 10-year Bund yield is currently around -24 bp and nearing the February high near -21 bp, while the 10-year BTP yield is currently around 80 bp and nearing the February high near 84 bp.  We think the ECB will have to accelerate its purchases further if eurozone yields continue to climb. We expect an accelerated pace to be maintained until at least the June meeting, when the ECB will likely reassess its program. 

The U.K. reported March CPI.  Headline inflation came in a tick lower than expected at 0.7% y/y, a bit lower than expected but up from 0.4% y/y in February as the uptrend remains intact but still well below the 2% target.  Of note, CPIH picked up as expected to 1.0 y/y from 0.7% in February.  Fuel costs (+2.9%), and to a lesser extent clothing items, were the main drivers here, and both are likely to continue driving near-term price pressure higher.  As in most major economies, the UK will experience a one-off inflation shock from the economic reopening that will be boosted by low base effects. The BOE is aware of this and has clearly communicated its intent to look through it even as the headline figure rises above its 2% target. All in all, the data changes nothing for asset prices as it confirms the BOE will stand pat for the foreseeable future.  Tightening expectations have been pared back a bit from their peak in mid-March, though the short sterling strip still shows a rate hike fully priced in by Q4 2022.  


Japan reported firm March supermarket sales.  Sales rose 1.3% y/y vs. -2.1% in February.  Yesterday, Japan reported March convenience store sales up 1.9% y/y, the first positive reading since February 2020.  March department store sales will be reported Friday.  These series have all been depressed by the lockdowns and so the positive readings offer some hope for a recovery in consumption.  All of this data will offer some clues for March retail sales, which will be reported April 28.  That said, Q2 is not looking too good after Osaka was placed under a state of emergency as virus numbers rise, with report suggesting this will also be declared in in Tokyo, Hyogo, and Kyoto prefectures.

New Zealand reported Q1 CPI.  Headline inflation came in as expected at 1.5% y/y, up from 1.4% in Q4.  This is the highest reading since Q2 2020 but remains in the bottom half of the 1-3% target range.  At its meeting last week, the RBNZ signaled that it is not yet thinking about removing stimulus, as “The committee agreed that, in line with its least regrets framework, it would not remove monetary stimulus until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives.  Given that uncertainty remains elevated, gaining this confidence is expected to take considerable time and patience.”  It also said inflation is likely to exceed its 2% target “for a period” but stressed that this is likely to be temporary and that the impact of the government’s new policies on house prices (and therefore inflation and employment) will “take time to be observed.”  Next meeting is May 26, when new macro forecasts will be released in its Monetary Policy Statement.

Korea reported strong trade data for the first 20 days of April.  Exports rose 45.4% y/y, while average daily exports rose 36.0% y/y due to there being one more working day compared with last year.  Exports of cars, mobile communication devices, and petroleum products all rose by more than 50% y/y, while chip exports rose 38.2%.  In a sign that the global recovery is deepening, exports to China rose 35.8% y/y, exports to the U.S. were up nearly 40%, exports to the E.U. rose 63%, and exports to Japan rose 21.3%.  Korean imports rose 31.3% y/y in the first 20 days of the month.   

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