Dollar Remains Under Pressure Ahead of ECB Decision

April 22, 2021

US bond yields remain depressed; Fed manufacturing surveys for April will continue to roll out; weekly jobless claims are for the BLS survey week; BOC delivered a hawkish hold; other central banks may also be willing to start tapering QE before year-end; Mexico reports mid-April CPI
ECB is expected to keep all policy settings unchanged; the euro tends to strengthen on ECB decision days; E.U. is in no hurry to grant equivalence to U.K. financial firms; Scottish political uncertainty continues; the outlook for Turkey is going from bad to worse
Relations between Australia and China continue to worsen

The gap in global yields continues to narrow. Some of the countries that saw the fastest rise in yields earlier this year  (Australia, U.S., U.K.) are now seeing this trend reverse. Meanwhile, yields in Europe are either stable or trickling higher. This narrowing gap surely reflects some mean reversion from disparate performance in the early stages of the vaccination programs. But it also suggests that concerns about rising inflation and the risk that the Fed will fall behind the curve may have been exaggerated.
The dollar remains under modest pressure ahead of the ECB decision.  DXY is down for the second straight day and for eight of the past nine.  It is once again testing the 91 area and a clean break below would set up a test of the February 25 low near 89.683.  Yet the euro feels heavy after having traded at the highest level since March 3 near $1.2080 earlier this week.  Sterling also feel heavy after it traded above $1.40 earlier this week for the first time since mid-March.  The lack of any follow-through has seen cable fall back to trade near $1.39 today.  Lastly, USD/JPY remains heavy and traded at the lowest level since March 5 near 107.80 before popping back above 108. 


US bond yields remain depressed.  The 10-year yield traded as low as 1.53% earlier today, matching last week’s low but is currently around 1.56%.  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.  The results of yesterday’s $24 bln 20-year bond auction were uninspiring but yields are still lower.  Indirect bidders took 58.7% vs. 61.4% at the last auction while the bid-to-cover ratio was 2.42 vs. 2.51 previously.  Today there will be a $18 bln 5-year TIPS auction.

Fed manufacturing surveys for April will continue to roll out.  Kansas City Fed is expected at 28 vs. 26 in March.  So far, Philly Fed came in at 50.2 vs. 44.5 in March and Empire survey came in at 26.3 vs. 17.4 in March, both stronger than expected.  The U.S. manufacturing sector remains in solid shape, with services expected to catch up quickly as lockdowns end.  March Chicago Fed National Activity Index (1.25 expected), existing home sales (-1.8% m/m expected), and leading index (1.0% m/m expected) will also be reported. 

Weekly jobless claims are for the BLS survey week.  Regular initial claims are expected at 610k vs. 576k the previous week, while regular continuing claims are expected at 3.60 mln vs. 3.731 mln the previous week.  Both of those readings last week were cycle lows.  Emergency continuing claims are reported with a 2-week lag to initial claims.  They fell to an unadjusted 12.2 mln total from 13.2 mln the previous week and was also a cycle low.  Overall, the claims data should continue to improve given the accelerated vaccinations and reopening seen in recent weeks.  Bottom line:  the labor market continues to heal but progress can be spotty week-to-week.  Early consensus for April NFP currently stands at 888k vs. 916k in March, but today’s claims data may change that.

Bank of Canada delivered a hawkish hold.  It will taper its asset purchases to CAD3 bln from CAD4 bln previously while keeping rates unchanged at 0.25%.  More importantly, its updated macro forecasts suggest earlier than anticipated rate hikes.  The bank said it sees slack in the economy absorbed and inflation at the 2% target in 2022.  It then added that its projections show the commitment to keep rates steady runs to H2 2022.  Previously, the guidance suggested no hikes until "into 2023" so this is a very hawkish signal from the BOC.

We don't want to make too much of the BOC move but we do think it sends a warning to the markets that other central banks may also be willing to start tapering QE before year-end.  Obviously, the Fed is key.  If the Fed wants to taper in H2 2021 as many believe, then we think officials will have to start talking about it by mid-year.  April 27/28 FOMC meeting seems too soon but the June 15/16 meeting may be the right time for the Fed to start preparing markets for tapering late in the year. 

Mexico reports mid-April CPI.  Headline inflation is expected to rise 5.92% y/y vs. 4.12% y/y in mid-March.  If so, this would be the highest since December 2017 and further above the 2-4% target range.  Next policy meeting is May 13 and no change is expected then.  The last move was a 25 bp cut to 4% back in February, when inflation was running much lower.  Officials have highlighted potential for further easing this year but none seems likely in the near-term as inflation spikes higher.  Bloomberg consensus sees one more possible cut this year but it will really depend on the data and on the peso.


The European Central Bank is expected to keep all policy settings unchanged.  The account of the March 11 meeting showed that “A significant increase in the purchase pace for the next three months was seen as warranted by the observed tightening of financing conditions and the lack of a material improvement in the growth and inflation outlook.” However, there was an “understanding that the total PEPP envelope was not being called into question in the current conditions and that the pace of purchases could be reduced in the future.”  In that regard, “Members agreed that the Governing Council would undertake a quarterly joint assessment… to determine the pace of purchases.”  This means that the June 10 meeting is quite live and that this meeting is a placeholder.  However, comments today will be studied closely for any clues about June.

The euro tends to strengthen on ECB decision days.  The single currency has gained the past three decision days, five  of the past six, and seven of the past nine.  It is up today ahead of the decision and could add to its streak if those gains are maintained.  The euro is up only about 1% vs.  the dollar since the March meeting and so we do no believe there is any sense of alarm at the ECB regarding the exchange rate.  Madame Lagarde will likely pay the usual lip service about monitoring the impact of the exchange rate on inflation but nothing more. 

The E.U. is in no hurry to grant equivalence to U.K. financial firms.  E.U. Commissioner for Financial Services McGuinness said the bloc isn’t under any pressure to help London finance access the single market and warned there won’t be any decisions anytime soon.  She stressed that “There isn’t any haste here. There is no pressure. There is no panic.” And why should there be?  Data show that European financial firms have benefitted quite nicely post-Brexit and so there is no need to rock the boat.  She added that the E.U. could hold a meeting on market access issues by mid-year but is still in the process of finalizing the memorandum of understanding on post-Brexit regulatory cooperation agreed to last month with the U.K.  Many had hoped that the MOU would speed things up for equivalence but that is clearly not the case.  Lastly, McGuinness said that the E.U. is focused on protecting the financial stability of the bloc and that policymakers will be studying U.K. plans to diverge from E.U. financial standards. 

Scottish political uncertainty continues.  A YouGov poll found that 45% of the U.K. would vote “no” for Scottish independence and 39% would vote “yes” if a referendum were to be held.  10% were undecided, 4% would not vote, and 2% refused to disclose their intentions.  When undecided voters are excluded,  47% would vote for independence, down 2 percentage points from the previous YouGov poll in early March and the lowest level of support for leaving the U.K. since December 2019; 53% would vote for Scotland to remain part of the U.K.  The same poll also shows that the pro-independence Scottish National Party could win a slim majority of two seats in the Scottish Parliament.  Expect polls to shift further ahead of the  May 6 elections in Scotland.

The outlook for Turkey is going from bad to worse. On the external front, Turkey’s relationship with the U.S. will only deteriorate from here.  Reports suggest President Biden will likely recognize the Armenian genocide.   Turkey was already removed from the F-35 fighter jet program due to the purchase of the Russian s-400 missile defense system, taking it a step further away from NATO. On the domestic front, more questions are being asked about the vanishing FX reserves. In addition, the government extended until June the short-term employment assistance for companies affected by the pandemic. The program covers two-thirds of employees’ salaries, helping some 4 mln workers. It also extended the tax reduction for the tourism sector until June. And in the background, the central bank credibility issues will continue to weigh on asset prices. The lira is down 1.2% against the dollar at just under the TRY8.30 level while CDS prices and yields are retracing some of the improvement seen over the last couple of weeks.


Relations between Australia and China continue to worsen.  Australian Foreign Minister  Payne announced that the federal government has scrapped both the memorandum of understanding and framework agreement signed between Victoria state and China’s National Development and Reform Commission under its Belt and Road Initiative.  The deals were meant to increase Chinese investment in new infrastructure projects and were signed back in 2018-2019.  The reversals are the first under laws passed by Parliament back in December that give the Foreign Ministry the ability to stop new and nullify previously signed agreements between foreign governments and Australia’s state and local governments as well as universities on the grounds of national interest. 

Retaliation from China is likely.  China’s Foreign Ministry said the move “is another unreasonable and provocative move taken by the Australian side against China.  It further shows that the Australian government has no sincerity in improving China-Australia relations - it is bound to bring further damage to bilateral relations, and will only end up hurting itself.”  Some Australian goods are already facing tariffs and restrictions from previous tensions stemming from the pandemic.  Stay tuned.

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