Dollar Rally Pauses as Risk Sentiment Improves

September 21, 2021
  • Two-day FOMC meeting begins today and ends with a decision tomorrow afternoon; Democratic lawmakers submitted a stopgap spending bill that also includes the suspension of the debt ceiling until December 2022; Prime Minister Trudeau will once again head up a minority government in Canada
  • U.K. energy crisis is worsening; Riksbank delivered a dovish hold, as expected; Hungary is expected to hike rates 25 bp to 1.75%
  • The two-day BOJ meeting began today and ends with a decision tomorrow; RBA minutes were dovish; RBNZ signaled that a 25 bp hike is likely next month; Indonesia kept rates steady at 3.5%, as expected

The dollar is down from yesterday’s highs as risk-off impulses fade a bit. DXY is down modestly after three straight up days but remains on track to test the August 20 high near 93.729. The euro found some support near $1.17 but also remains on track to test of the August 20 low near $1.1665. Sterling should remain under pressure due to the growing energy crisis (see below), while USD/JPY remains below 110 despite today’s recovery in risk sentiment. Hang Seng was flat while, European equities are broadly higher and U.S. futures are showing a moderate bounce. Even Chinese property developers, the closest barometer for this crisis, seem to have stabilized. But it seems far too early to say we are over the worse, it could just be the calm before the storm. We believe a hawkish Fed and ongoing China risks will help keep this dollar rally going.


The two-day FOMC meeting begins today and ends with a decision tomorrow afternoon. We do not believe that what’s going on in China will impact the Fed’s deliberations at all. No change in policy is expected but we expect a hawkish hold as the official statement and the minutes should continue to lay the groundwork for tapering this year. The Fed is likely to wait until the November 2-3 meeting to make an official tapering announcement, with a likely start in December. August building permits (-1.8% m/m expected) and housing starts (1.0% m/m expected) will be reported today, along with Q2 current account data (-$191 bln expected).

Democratic lawmakers submitted a stopgap spending bill that also includes the suspension of the debt ceiling until December 2022. This is a big gamble as Republican leaders have said they won’t support any measures to raise that ceiling. It’s really turning into a game of chicken at this point. Note that the legislation also includes money for hurricane and wildfire disaster aid, which will make it more difficult for some Republican lawmakers to vote against it. Over the summer, the Democrats had a choice to make the debt ceiling vote part of the budget reconciliation process that would not require any Republican support but instead insisted on a bipartisan approach. That might have worked ten years ago but the mood on Capitol Hill is very different now and so this could very well backfire.

Prime Minister Trudeau will once again head up a minority government in Canada. As of this writing, results suggest his Liberals have won or are leading in 156 of the 338 ridings, little changed from 2019. The opposition Conservatives have won or are leading in 122, one more than they won in 2019. Trudeau says election result now gives him a clear mandate to get Canada through the pandemic. The vote certainly rewards Trudeau for his handling of the pandemic by returning him to power. However, there was clearly a signal from the voters that they did not care to hold an election in the middle of the pandemic. Either way, there are no real policy implications from this status quo outcome.


The U.K. energy crisis is worsening. Business Secretary Kwarteng warned “The next few days are going to be quite challenging. This is very serious.” To make matters worse, a cable carrying power from France that was knocked out last week won’t be coming back online until October 23, a month later than previously thought. Officials say surging natural gas prices have caused five suppliers to go under in recent weeks and warn that between another five to eight are likely to fail this winter. There is growing chatter that some sort of government intervention will be needed soon. Of course, surging energy prices and potential shortages will only add to the uncertainty regarding inflation and supply chains. That is another reason for the BOE to deliver a dovish hold Thursday.

Riksbank delivered a dovish hold, as expected. The flat rate path was kept flat through Q3 2024 while the bank confirmed that QE will be fully utilized by the end of 2021 and that its size will be maintained at least until end- 2022. Inflation forecasts were tweaked higher but the bank said it welcome inflation above 2% for some time as this would help to “more clearly anchor price and wage expectations in a way that is compatible” with its inflation target. Lastly, the bank stressed that “The risks with reducing stimulation measures too early are therefore still judged to be greater than the risks of retaining them too long.” The Riskbank clearly stands out as one of the most dovish central banks right now and the updated forecasts suggest it will remain on hold for the foreseeable future.

National Bank of Hungary is expected to hike rates 25 bp to 1.75%. The markets is split, however. Of the 20 analysts surveyed by Bloomberg, 1 sees no hike, 5 see 15 bp, 1 sees 20 bp, 6 see 25 bp, and 7 see 30 bp. So far during this tightening cycle, the central bank has hiked by 30 bp three straight meetings and so a 25 bp move would represent a slight slowing. CPI rose 4.9% y/y in August, the highest since June and further above the 2-4% target range. As such, we do not think the data warrant any slowdown in the tightening cycle yet.


The two-day Bank of Japan meeting began today and ends with a decision tomorrow. It is likely to deliver a dovish hold, just as it did at the last policy meeting July 16. New macro forecasts were unveiled then and the bank saw targeted core inflation at 0.6% (0.1% in April) for FY2021, 0.9% (0.8%) for FY2022, and 1.0% (1.0%) for FY23. The bottom line is that core inflation is seen remaining well below the 2% target through FY23. As such, the BOJ has signaled that it intends to keep policy accommodative until FY24 at least. The BOJ is on hold for the foreseeable future as markets await the next fiscal package. We do not believe monetary policy will be impacted by the upcoming change to the LDP leadership.

RBA minutes were dovish. The bank expects progress towards its inflation and employment goals will be slowed by the delta variant, noting “There was considerable uncertainty about the timing and pace of the recovery, which was likely to be slower than experienced earlier in 2021.” The bank commenced tapering but considered delaying it until November. The RBA eventually decided against a delay since the economy was expected to return to its pre-delta path by mid-2022. Lastly, it noted that since lockdowns are likely to be lifted gradually, the recovery could be slower than what was seen earlier in the pandemic. Next policy meeting is October 4 and another dovish hold is expected.

RBNZ signaled that a 25 bp hike is likely next month. Assistant Governor Hawkesby said that due to ongoing uncertainty where risks are evenly balanced, “central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 bp increments.” This was clearly pushback against market expectations for a 50 bp hike to start the tightening cycle when the RBNZ next meets October 6. Markets responded accordingly and now see zero chance of a 50 bp move, instead fully pricing in 25 bp hikes at each of the October 6, November 24, and February 23 meetings. Two more hikes are priced in for the rest of 2022.

Bank Indonesia kept its 7-day repo rate at 3.5%, as expected. There are strong arguments against easing given the improving virus numbers and surprisingly favorable data, such as last week’s trade and current account figures. Moreover, easing would only apply unwanted pressure on the currency due to uncertain foreign investor appetite. We don’t think rates are going anywhere for the foreseeable future. The bank’s official forecast remained unchanged at a well-balanced 3.5-4.3% for GDP this year and CPI withing the 2-4% target range. IDR is unchanged on the day.

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