Dollar Remains Rangebound

December 09, 2021
  • The currency markets remain in a holding pattern; U.S. Treasury concludes its coupon issuance with a $22 bln sale of 30-year bonds; weekly jobless claims are worth watching; BOC kept policy on hold, as expected; Mexico reports November CPI; Brazil delivered the expected 150 bp hike yesterday
  • U.K. announced tighter restrictions in the hopes of preventing another spike in the virus numbers; sterling continues to fade along with December liftoff expectations; reports suggest the ECB will discuss a temporary increase in its asset purchases at next week’s meeting; Germany reported firm October trade data; Hungary hiked its 1-week deposit rate 20 bp to 3.3%, as expected; Poland delivered the expected 50 bp hike yesterday to 1.75%
  • China’s aggregate financing came in a fit softer than expected at RMB2.610 trln in November

The dollar is regaining some traction. After trading as low as 95.849 yesterday, DXY is currently trading back near 96.10. The November cycle high near 96.938 remain in sight as 2-year rate differentials continue to move in the dollar’s favor. The euro bounce ran out of steam near $1.1350 and is back to testing $1.13 as we continue to look for a test of the November cycle low near $1.1185. Sterling is underperforming after new U.K. Covid restrictions were announced (see below) and on track to break below yesterday’s cycle low near $1.3165. With market sentiment improving, USD/JPY has stabilized near 113.50 but remains subject to bouts of risk-off selling. We believe the underlying trend for a stronger dollar remains intact.

AMERICAS

The currency markets remain in a holding pattern. We believe investors may be reluctant to push out of recent trading ranges ahead of event risk next week. There are multiple central bank meetings that can deliver a variety of potential surprises. What we have seen this week from the RBA and the BOC is an excess of caution and that is what we expect next week from the ECB, BOE, SNB, and BOJ. All these are expected to deliver dovish messages. The two notable exceptions are Norges Bank and the Fed, with the former expected to hike rates 25 bp and the latter expected to accelerate its tapering. When all is said and done, the relatively hawkish Fed is likely to maintain the current strong dollar trend.

U.S. Treasury concludes its coupon issuance with a $22 bln sale of 30-year bonds. At the previous auction, indirect bidders took 59.0% while the bid-cover ratio was 2.20. Yesterday, the $36 bln sale of 10-year notes met strong demand, as indirect bidders took 68.8% vs. 71.0% at the previous auction and the bid-cover ratio was 2.43 vs. 2.35 at the previous auction. The $54 bln sale of 3-year notes Tuesday was mixed, as indirect bidders took 52.2% vs. 57.6% at the previous auction and the bid-cover ratio was 2.43 vs. 2.33 at the previous auction.

Weekly jobless claims are worth watching. Initial claims are expected at 220k vs. 222k the previous week and continuing claims are expected at 1.91 mln vs. 1.956 mln the previous week. Last week, the four-week moving average for initial claims fell to 239k, the lowest since March 2020. If we get a couple more readings near 200k, that 4-week moving average will be pulled lower to levels we haven't seen since 2019 and 2020, when the U.S. was last at full employment. Bottom line: we are closer to full employment than we thought and that will likely start showing up even more in the wage numbers. Yesterday, October JOLTS jobs openings came in at 11.033 mln vs. 10.469 mln expected and 10.602 mln in September. This is back near the record high of 11.098 mln from July and supports the view that hiring is being constrained by labor supply, not demand. The solution? Wages have to go up. October wholesale trade sales and inventories and Q3 household net worth will also be reported.

Bank of Canada kept policy on hold, as expected. The policy rate was kept at 0.25%, QE remains in its reinvestment stage, and forward guidance was left unchanged. Recall at the last meeting October 27, the bank moved up its timetable for the output gap to close to Q2 from H2 previously. Still, the BOC followed the Fed in dropping its reference to inflation as temporary, and also noted a strong job market and elevate inflation. Still, it said that the omicron variant has “injected renewed uncertainty.” CAD traded a little softer after the decision, which clearly disappointed those looking for a more hawkish tilt. The next meeting January 26 will offer a better opportunity to signal a shift, as 1) new macro forecasts will be released and 2) the potential impact of omicron will be better known.

After the decision, BOC liftoff expectations were adjusted down a bit. WIRP suggests there's a 1 in 3 chance for a January 26 hike vs. 2 in 3 earlier this week, but March 2 is still fully priced in. Two more hikes in Q2 are still seen as highly likely but the conviction has waned from being fully priced in before the BOC meeting. The swaps market is now pricing in nearly 150 bp of tightening over the next 12 months, which we believe is hard to reconcile with the current forward guidance suggesting Q2 liftoff.

Mexico reports November CPI. Headline inflation is expected at 7.24% y/y vs. 6.24% in October. If so, it would be the highest since January 2001 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike in June and then followed up with 25 bp hikes each in August, September, and November. Next policy meeting is December 16 and another 25 bp hike to 5.25% is expected. In its quarterly inflation report last week, the bank forecast inflation of 6.8% by end-2021, 3.3% by end-2022, and 3.0% by end-2023, suggesting tightening will continue into early 2022. Swaps market sees the policy rate peaking at 7.25% by end-2022.

Brazil central bank delivered the expected 150 bp hike yesterday, lifting rates to 9.25% with added hawkish overtones to the statement. The bank characterized growth as “moderately below expectations” but flagged the “de-anchoring of long-term inflation expectations.” This pretty much settles the continued hawkish posture going forward – which is justified, in our view. The bank hinted that it’s quite likely that we will see a another move of this magnitude at the next meeting February 2, though there are plenty of downside risks that could temper their hawkish enthusiasm and result in a smaller move. We expect this stance to provide some solid near-term support for BRL, but the medium-term outlook will still be in the hands of the political cycle.

EUROPE/MIDDLE EAST/AFRICA

As expected, the U.K. announced tighter restrictions in the hopes of preventing another spike in the virus numbers. Prime Minister Johnson said that due to the omicron variant, the government is advising people to work from home and requiring so-called vaccine passports at large venues, adding that it’s the “proportionate and responsible thing to do to move to Plan B.” The CBI called the new measures a “big setback for businesses” and added that firms would need help implementing vaccine passports.

While these measures are relatively mild compared to past lockdowns, it comes at a time when Johnson and his Tory party are already unpopular for a variety of reasons. Yesterday’s snap polls by Savanta ComRes and Opinium both showed a majority of respondents believe Johnson should resign. A true test for Johnson will be the by-election in North Shropshire next week. While typically a Tory stronghold, this by-election is for the seat vacated by MP Paterson, who resigned over an ethics scandal.

Sterling continues to fade along with December liftoff expectations. WIRP suggests odds of a hike next Thursday have fallen to 1 in 5, while a February 3 hike is no longer fully priced in. The 2-year Gilt yield has fallen from a peak near 0.75% in early November to 0.42% currently, dragging the differential with the U.S. down to -28 bp, he lowest since January. Sterling is trading close to the cycle low yesterday near $1.3165 and is on track to test the December 2020 low near $1.3135 and then the mid-November 2020 low near $1.3105. After that is the November 2 low near $1.2855.

Reports suggest the European Central Bank will discuss a temporary increase in its Asset Purchase Program at next week’s meeting. Details are sketchy but a newswire report suggests officials are focused on boosting its APP purchases but with limits on the size and timing. Alternatively, the bank is reportedly discussing increasing APP for a short period of time with a commitment to continue with a smaller amount of purchases afterwards. To us, it simply sounds like all options are open but we believe most ECB officials are reluctant to remove accommodation now giving the building headwinds. We look for an extension of asset purchases via increased APP after the end of PEPP in March. However, there is a risk that a consensus cannot be reached next week and a decision may be put off until the February 3 meeting.

Germany reported firm October trade data. Exports jumped 4.1% m/m vs. 0.8% expected and -0.7% in September, while imports rose 5.0% m/m vs. 0.4% expected and a revised 0.4% (was 0.1%) in September. German data have been weakening in Q4 as the pandemic resurfaced and so today’s data is a welcome surprise. However, factory orders plunged -6.9% m/m in October, with most of the weakness concentrated in export orders. As such, we do not expect this export strength to last.

National Bank of Hungary hiked its 1-week deposit rate 20 bp to 3.3%, as expected. The central bank has hiked the benchmark rate by a total of 150 bp through the last policy meeting November 16 to 2.1%. Since that meeting, it has gone on to hike the one-week deposit another 150 bp in total to 3.30% currently. November CPI came in higher than expected, with headline inflation at 7.4% y/y vs. 6.5% in October. This is the highest since December 2007 and further above the 2-4% target range. The bank holds its regular monthly meeting next Wednesday and the bank should deliver a large hike in the benchmark rate to underscore its determination to limit price pressures.

National Bank of Poland delivered the expected 50 bp hike yesterday to 1.75%. No surprise here, as the bank is still playing catch-up in the region after having started relatively late. Inflation is running just below 8% y/y so the real policy rate is still deeply negative and has a lot of room to adjust, even after discounting the likely temporary price pressures. There wasn’t a lot of price action following the meeting with markets still waiting to see if the bank will step up the cycle and get ahead of inflation expectations.

ASIA

China’s aggregate financing came in a fit softer than expected at RMB2.610 trln in November. However, the increase from CNY1.59 trln in October suggests that the authorities’ efforts to stimulate the economy are materializing. These include the cut in required reserves and liquidity support for SMEs. The main drivers were the increase in corporate and government bond financing, also seen in higher new loans of CNY1.27 trln vs. CNY826 bln in October. All in all, we are still at the start of this new counter-cyclical push by the government to lean against the risks of the new variant, possible global slowdown, bottleneck issues, and pressure on the domestic real estate sector from property developers. Elsewhere, November CPI rose 2.3% y/y vs. 2.5% expected and 1.5% in October and PPI rose 12.9% y/y vs. 12.1% expected and 13.5% in October.

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