Dollar Remains Under Pressure as Holiday-Shortened Week Begins

November 20, 2023
  • The dovish Fed narrative remains in place; yet the 2-year differentials have not moved all that much; October leading index is the only data report
  • ECB officials continue to push back against the dovish market narrative; BOE Governor Bailey speaks later today
  • The advisory board for Japan’s Finance Ministry warned of the impact of higher rates on the nation’s fiscal trajectory; reports suggest China regulators are drafting a list of 50 property developers that would be eligible for support

The dollar remains under pressure as a holiday-shortened week gets under way. DXY is trading lower near 103.604 and is on track to test the August 80 low near 102.936. The euro is trading higher near $1.0925 and is nearing the August 30 high near $1.0945, while sterling is trading flat near $1.2465. Clean break above $1.2475 sets up a test of the August 30 high near $1.2745. USD/JPY is the big mover again today, trading at the lowest since early October near 148.15. the pair remains on track to test the October 3 flash crash low near 147.45. With the dollar rally stalled, it will take some firm real sector data to challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the market thinks (see below). That said, the dollar remains vulnerable until we see a shift in market sentiment and expectations.


The dovish Fed narrative remains in place. As a result, there is likely to be ongoing downward pressure on U.S. yields and the dollar. The 10-year yield traded as low as 4.38% Friday, down from the late October peak near 5.02% and the lowest since late September; it has recovered to 4.46% today. Elsewhere, the 30-year yield traded as low as 4.56% Friday, down from the late October peak near 5.18% and the lowest since late September; it has recovered to 4.62% today. Does one month of somewhat favorable inflation data really warrant such a massive move in rates? We think not and yet here we are. We must respect this move while wholeheartedly disagreeing with it.

Yet the 2-year differentials have not moved all that much. While down from the recent peaks, these differentials remain relatively high in terms of favoring the dollar. That’s because easing expectations for the ECB and BOE have picked up while tightening expectations for the BOJ have fallen. As such, we do not believe that this selloff in the dollar is really warranted. These moves still have some room to run but at some point, we believe the dovish narrative will eventually reverse once again.

Barkin speaks today. He has been one of the leading doves at the Fed. Yet last week, he acknowledged that continued strong growth could warrant higher rates. In the not-too-distant past, Barkin was firmly in the peak rates camp along with Bostic and the other doves. WIRP suggests no odds of a hike at either the December or January FOMC meetings. After that, there are 30% odds of a rate cut March 20 that rise to 75% May 1. Four cuts are nearly priced in by end-2024 and this dovish rate path is highly unlikely given the current evolution of the U.S. economy. But again, this narrative is unlikely to change until the data challenge it.

October leading index is the only data report. It is expected at -0.7% m/m vs. -0.7% in September. Of note, both the y/y and 6-month annualized rates are starting to turn higher whilst remaining deeply negative. The fact that the U.S. economy continues to grow at or above trend despite nearly twenty months of negative m/m readings in the leading index begs the question of what this indicator can really tell us.


ECB officials continue to push back against the dovish market narrative. Wunsch asked “Is it a problem if everybody believes we’re going to cut? Then we have a less restrictive monetary policy. And I’m not sure that then it’s going to be restrictive enough. So it increases the risk that you have to correct in the other direction.” This is exactly the problem that the Fed faces as its embrace of the soft landing narrative has led to looser financial conditions in the U.S. Wunsch added that “I think markets are relatively optimistic today that they exclude the possibility that we have to do more or that we have to remain at 4% for longer.” WIRP suggests no odds of a rate hike in December, with cuts starting to get priced in next year. There are nearly 75% odds of a rate cut April 11 and fully priced in for June 6. Lane, Vujcic, de Cos, and Villeroy also speak today.

Bank of England Governor Bailey speaks later today. He has been unequivocally dovish in recent months, and we expect his tone to remain unchanged as the U.K. data have weakened further. Easing expectations have picked up. WIRP now suggests less than 5% odds of a hike either December 14 or February 1. The first cut is 55% priced in for May 9 and fully priced in June 20. Bailey testifies before Parliament tomorrow.


The advisory board for Japan’s Finance Ministry warned of the impact of higher rates on the nation’s fiscal trajectory. In its recommendations to the government, the board noted “It will become even more important to manage Japan’s finances responsibly, bearing in mind the risks of a sharp rise in interest rate payments. There is a possibility of entering a different phase in which high inflation and rising interest rates are normal.” While higher inflation will improve the debt/GDP ratios by boosting nominal GDP, it seems likely that this improvement could be more than offset by higher interest rates, which would push debt servicing costs even higher. The board added that “The fiscal situation shouldn’t be a drag for the economy. We shouldn’t miss this chance to turn our focus to restoring fiscal health given the state of the economy.” Recent weakness in the data have led to a drop in JGB yields and have pushed out BOJ liftoff expectations into June vs. April previously.

Reports suggest China regulators are drafting a list of 50 property developers that would be eligible for support through a range of financing options. The list would include both private and state-owned companies and is clearly meant to identify which firms the government believes are important enough to save. In turn, this gesture of support is meant to send a signal to the markets and help encourage the private sector to channel any support into these firms. According to the reports, the list has not been finalized but already include China Vanke, Seazen Group, and Longfor Group. Not surprisingly, other reports suggest that China’s major lenders were encouraged to meet all “reasonable” funding needs for property firms. Despite this show of support, the sector is likely to remain under stress and markets should be prepared for an eventual shakeout in the property sector that will see defaults and massive debt restructuring. Stay tuned.

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