Dollar Remains Under Pressure as European Data Improve

May 21, 2021
  • Higher U.S. real rates are not doing the dollar any favors; preliminary May Markit PMI readings will be the highlight; research by the SF Fed suggests anecdotes of enhanced unemployment benefits keeping workers home are overstated; Canada reports March retail sales; BOC Governor Macklem delivered a sobering message regarding the housing market
  • Middle East tensions have eased as Israel and Hamas agreed to a cease-fire; eurozone reported firm preliminary May PMI readings; U.K. reported April strong retail sales and preliminary May PMI readings
  • Japan reported soft April national CPI and preliminary May PMI readings; Australia reported firm preliminary April retail sales and May PMI readings; Korea reported strong trade data for the first 20 days of May

The dollar remains soft and has given up all of its post-FOMC minutes gains. DXY is modestly lower today and is trading at new lows for this move near89.65. Until we get a larger move up in U.S. rates, DXY is on track to test the January 6 low near 89.209. The euro remains bid above $1.22 and is eyeing the January 6 higher near $1.2350, while sterling is testing its 2021 high near $1.4235. After that is the April 2018 high near $1.4375. USD/JPY remain heavy and continues to trade below 109. Until we see stronger U.S. data and higher U.S. rates, the greenback is likely to remain under pressure.


Higher U.S. real rates are not doing the dollar any favors. At -0.82%, the 10-year real yield is the highest since April 30 and yet the dollar is making new lows for this move. What’s changed is that the eurozone and U.K. data have surprised to the upside, weakening the divergence story that had benefited that dollar in Q1. This can be seen in the narrowing 10-year U.S.-Germany differential, which has narrowed to 175 bp, the lowest since late February. This sets up the question of whether the ECB is alarmed enough to take any action. The stronger euro and rising eurozone yields are a huge risk to the eurozone recovery and so the June 10 ECB meeting has taken on great significance in light of recent market moves.

Preliminary May Markit PMI readings will be the highlight. Manufacturing is expected at 60.2 vs. 60.5 in April, while services is expected at 64.4 vs. 64.7 in April. If so, this would pull the composite PMI down slightly from 63.5 in April. We are getting the first broad snapshots for May this week and these have likely taken on more significance in light of the disappointing jobs and retail sales data for April. So far this week, Fed manufacturing surveys show some moderating strength. Empire survey came in at 24.3 vs. 26.3 in April, while the Philly Fed survey came in at 31.5 vs. 50.2 in April. Of note, these May readings are still unusually high. April existing home sales (1.0% m/m expected) will also be reported.

Weekly jobless claims data are worth discussing. Initial claims for the BLS survey week containing the 12th of the month fell to 444k, a new pandemic low. Emergency initial claims also fell to a pandemic low of 95k. The data point to a solid NFP number for May, with consensus currently at 600k vs. 266k in April. Obviously, this is subject to change as new clues come in. Of note, continuing claims rose to 3.75 mln but are reported with a 1-week lag and so next week’s reading will be for the BLS survey week. It’s clear from the April jobs report that the improvement in the U.S. labor market has entered into an uneven and unpredictable phase.

Research by the San Francisco Fed suggests anecdotes of enhanced unemployment benefits keeping workers home are overstated. A working paper by researchers there suggests that enhanced unemployment benefits didn't have too much of an impact on workers looking for jobs. The paper finds that in any given month in 2021, "about seven out of 28 unemployed individuals receive job offers that they would normally accept, but one of the seven decides to decline the offer due to the availability of the extra $300 per week in UI payments." In other words, only 1 worker out of 28, or 3.5%, decided to continue receiving unemployment benefits instead of going back to work. Th authors concluded that "The value of a job, especially in a depressed labor market, significantly outweighs the value of the temporary additional UI income.” Lastly, the study finds that the only workers who preferred to remain on unemployment rather than working were those in the lowest-paid profession, food service and janitorial services.

As of this writing, over twenty states have decided to end the extra $300 per week enhanced benefits before they expire in September. According to recent data, this would translate into 3.5 mln fewer people receiving those benefits. This has negative implications for May and June retail sales and are all the more serious coming after the disappointing April data.

Canada reports March retail sales. Both headline and sales ex-autos expected to rise 2.3% m/m vs. 4.8% in February. Yesterday, Bank of Canada Governor Macklem made some dovish comments. He noted there is still a lot of excess supply in the economy, adding that important parts of the economy remain very weak. He expects base effects on inflation to be temporary, and that downward pressure will pull inflation back to the 2% target. Recall headline inflation spiked to 3.4% y/y in April from 2.2% in March. Nothing was said about the strong Loonie but we know that's a growing concern, especially with USD/CAD testing the 1.20 area. Next policy meeting is June 9 and no changes are expected.

Elsewhere, Governor Macklem delivered a more sobering message regarding the housing market. In releasing of the Bank of Canada’s annual Financial System Review, Macklem said recent gains in home prices aren’t sustainable and warned households against taking on too much mortgage debt as interest rates will eventually rise. He said some households have taken on “significantly” more debt, with many carrying very large mortgages relative to income. He stressed that both borrowers and lenders need to understand that interest rates won’t always remain at the current historic lows. Lastly, he said that “Counting on ever higher house prices to build home equity that can be used to refinance mortgages in the future is a bad idea.”


Middle East tensions have eased as Israel and Hamas agreed to a cease-fire. The 11-day conflict was the worst in terms of casualties of the four wars waged in Gaza since Hamas seized control in 2007, with Israel coming under intense pressure by the U.S. to end the hostilities. Egypt helped broker the deal, but with the underlying causes of the conflict still in place, the truce is likely to be fragile. Biden praised the cease-fire and pledged to continue working towards regional peace, with Secretary of State Blinken traveling to the region in the coming days. The news is nevertheless welcome and now all eyes turn to politics as the opposition returns to the hard work of forming a coalition. The violence was initially thought to have helped Netanyahu’s chances of staying in power, but the cease-fire has come under criticism, including some hard right nationalists that are Netanyahu's natural allies. Itamar Ben Gvir of the far-right Jewish Power party called the cease-fire "shameful" and a "surrender to terrorism," while Gideon Saar, a former ally who now leads a small party opposed to Netanyahu, called the cease-fire "embarrassing," while Gadi Yevarkan, a junior minister in Netanyahu's Likud party, said the cease-fire was "a reward for terrorism.” Stay tuned.

Eurozone reported firm preliminary May PMI readings. Manufacturing fell to 62.8 vs. 62.5 expected and 62.9 in April, services jumped to 55.1 vs. 52.5 expected and 50.5 in April, and composite PMI rose to 56.9 vs. 55.1 expected and 53.8 in April. Looking at the country breakdown, France’s composite moved the most, rising to 57.0 vs. 53.7 expected and 51.6 in April, while Germany’s rose to 56.2 vs. 57.1 expected and 55.8 in April. Final readings will be reported June 3, with Spain and Italy to be reported then.

U.K. reported April strong retail sales and preliminary May PMI readings. Headline sales jumped 9.2% m/m, more than double the expected 4.5% and revised 5.1% (was 5.4%) in March, while sales ex-auto fuel rose 9.0% m/m vs. 4.4% expected and a revised 4.6% (was 4.9%) in March. Manufacturing jumped to 66.1 vs. 60.8 expected and 60.9 in April, services rose to 61.8 vs. 62.2 expected and 61.0 in April, and composite PMI rose to 62.0 vs. 61.9 expected and 60.7 in April. Of note, the composite reading is the highest since the index began in 1998. It’s clear that the economic impact of reopening is stronger than many of us anticipated and fits in with the upbeat tone taken by Bank of England officials.


Japan reported soft April national CPI and preliminary May PMI readings. Both headline and core (ex-fresh food) CPI came in a tick higher than expected at -0.4% y/y and -0.1% y/y, respectively. The deflationary readings are all the more remarkable in light of rising inflation everywhere else in the world, and underscores how deeply ingrained deflation is in Japan. Manufacturing PMI fell to 52.5 from 53.6 in April, services PMI fell to 45.7 from 49.5 in April, and the composite PMI fell to 48.1 from 51.0 in April.

All in all, the Japanese data support the view that deflation pressures persist even as headwinds to the economy build. Indeed, the drop in the composite PMI below 50 will heighten fears that GDP contracted again in Q2 due to the widening lockdowns. Reports suggest the current lockdowns that are due to expire at the end of May might be extended until late June, about a month before the Tokyo Olympics are scheduled to start. The BOJ is on hold for now but we still expect another fiscal package over the summer as the economy slumps and Suga’s popularity wanes ahead of October elections.

Australia reported preliminary firm April retail sales and May PMI readings. Sales rose 1.1% m/m, more than double the expected 0.5% and slightly less than the 1.3% gain in March. Manufacturing PMI rose to 59.9 from 59.7 in April, services PMI fell to 58.2 from 58.8 in April, and the composite PMI fell to 58.1 from 58.9 in April. Overall, the economic recovery continues but the weak April jobs data is a reminder that improvements remain uneven. Given the RBA’s focus on the labor market, we think it is likely to extend its QE program at the July meeting.

Korea reported strong trade data for the first 20 days of May. Exports jumped 53.3% y/y while imports rose 36.0% y/y. However, when adjusted for working days, averaged daily exports rose 59.1% y/y. The export gains were broad-based, with exports to China up 25.2%, to the U.S. up 87.3%, to the EU up 78.1%, and to Japan up 30.6%. Much was of course due to low base effects, but as the regional bellwether, Korea’s ongoing export strength bodes well for trade and economic activity in Q2. Elsewhere, U.S. President Biden will meet with South Korean President Moon Jae-in at the White House. North Korea will be at the top of the agenda, but we also suspect improved collaboration on the global chip shortage will be an important topic as well.

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