Dollar Rises Along With U.S. Yields

May 09, 2022
  • U.S. yields continue to rise; with the FOMC meeting out of the way, Fed speakers will spread the word this week; Mexico reports April CPI
  • ECB officials continue to sound hawkish; ECB tightening expectations have picked up modestly; one unfortunate by-product of ECB hawkishness is rising peripheral spreads
  • BOJ minutes shed more light on the April 27-28 meeting; Japan March cash earnings came in higher than expected but soft overall; China reported April trade data; RBI intervened to support the rupee today

The dollar continues to gain. DXY traded today at a new cycle high near 104.187, the highest since December 2002. We continue to target the November 2002 high near 107. The euro remains steady near $1.0550 but we continue to target the January 2017 near $1.0340. USD/JPY traded today at a new cycle high near 131.35 and we continue to target the January 2002 high near 135.15. Sterling traded today at a new cycle low $1.2260 as it nears a break below the June 2020 low near $1.2250, which would set up a test of the May 2020 low near $1.2075. RBI intervened to support the rupee (see below) as EM FX continues to suffer from higher U.S. rates and slowing global growth.


U.S. yields continue to rise. The U.S. 10-year yield traded today at a new cycle high near 3.20% and is approaching the October 2018 high near 3.26%. After that is the February 2011 high near 3.77%. Some are claiming that rising 10-year yields means the market has lost confidence in the Fed, but we note that the 10-year breakeven inflation rate remains stuck near 2.86%, which we think shows the market has confidence in the Fed that it will limit inflation. As a result, the real 10-year yield has climbed to 0.32%, the highest since July 2019. Of note, the 3-month to 10-year yield curve has steepened to 238 bp, the steepest since July 2015. If the bond market were worried about recession, this curve would be much flatter and heading towards inversion.

With the FOMC meeting out of the way, Fed speakers will spread the word this week. Williams, Barkin, Waller, Kashkari, Mester, and Bostic all speak Tuesday. Bostic speaks again Wednesday, while Daly speaks Thursday. Kashkari and Mester speak Friday. Last Friday, Barkin did his job and put 75 bp back on the table, adding that he want to hike rates “as fast as feasible.” Expect other Fed officials to fall in line with this more hawkish stance this week. We believe Powell erred in giving up the bazooka in his pocket so easily and now the Fed is working to get it back.

Mexico reports April CPI. Headline inflation is expected at 7.73% y/y vs. 7.45% in March, while core is expected at 7.18% y/y vs. 6.78% in March. If so, headline would be the highest since January 2001 and further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to hike rates 50 bp to 7.0%. Minutes from the March meeting suggest policymakers mostly favored continuing the recent pace of 50 bp hikes. One noted that market expectations for tightening were too high, while another said raising rates too fast could hit growth. The swaps market is pricing in 300 bp of further tightening over the next 12 months that would see the policy rate peak near 9.50%.


ECB officials continue to sound hawkish. Over the weekend, Rehn warned “We are seeing signs of second-round effects. It’s important that we send a signal that these higher inflation expectations we are currently witnessing will not become entrenched.” He added that it’s “reasonable that we will rather sooner, in my view in July, start raising rates in line with our normalization of monetary policy. And would expect that when autumn comes, we would be at zero.”

ECB tightening expectations have picked up modestly. WIRP suggests odds of liftoff June 9 are now around 45% vs. 30% at the start of last week, while liftoff July 21 remains fully priced in. The swaps market is now pricing in 155 bp of tightening over the next 12 months followed by another 60 bp of tightening priced in over the following 12 months that would see the deposit rate peak near 1.75% vs. 1.50% at the start of last week. There is a full slate of ECB speakers this week and most are expected to tilt hawkish. Nagel and Guindos speak Tuesday. Nagel, Lagarde, Vasle, Knot, Centeno, Buch, Muller, and Schnabel all speak Wednesday. De Cos speaks Thursday. Centeno speaks Friday.

One unfortunate by-product of ECB hawkishness is rising peripheral spreads. The 10-year Italian spread to Germany is currently around 205 bp, moving above 200 bp for the first times since May 2020. Similarly, the 10-year Greek spread to Germany is currently around 250 bp, also the highest since May 2020. Just as the periphery benefited from loose ECB policy, it will suffer as the bank removes that accommodation. While Madame Lagarde famously claimed that the bank was not there to narrow spreads, the fact that the ECB is currently working on yet another crisis mechanism to contain rising peripheral yields says otherwise. So far, the march higher in these spreads has been orderly but we suspect market conditions will deteriorate as the ECB moves closer to liftoff. Stay tuned.


Bank of Japan minutes shed more light on the April 27-28 meeting. Minutes from that meeting show several members saw the need to continue stimulus. One policymaker focused on the lack of wage pressures, while another regarded higher inflation as temporary. A few felt it necessary to contain rising yields through various measures. The BOJ will then release the summary of opinions Thursday. At the June meeting, all policy settings were kept unchanged and the bank said that rates will remain at present or lower levels. It underscored its commitment to Yield Curve Control by announcing it would carry out unlimited fixed rates 10-year JGB purchases every business day at the upper target limit of 0.25%. Updated forecasts suggested no need to tighten for several years. Next policy meeting is June 16-17 and all signs point to continued dovishness from the BOJ.

Japan March cash earnings came in higher than expected but soft overall. Nominal earnings were steady at 1.2% y/y vs. 0.9% expected, while real earnings came in at -0.2% y/y vs. -0.6% expected and flat in February. Several BOJ policymakers have said that they would like to see wage significant wage growth as well as inflation at the 2% target before they would consider tightening policy and so the earnings data have taken on greater importance. As things stand, it’s clear that wage growth remains modest. Household spending will be reported Tuesday and is expected at -3.3% y/y vs. 1.1% in February.

China reported April trade data. Exports came in at 3.9% y/y vs. 2.7% expected and 14.7% in March, while imports came in flat y/y vs. -3.0% expected and -0.1% in March. Exports to the U.S. rose 9.4% y/y, while exports to Russia slumped around -26% y/y. Activity is grinding to a halt under Xi’s COVID Zero policy. Despite pledges to stimulate the economy, the measures announced so far have been minimal. The yuan continues to weaken, with USD/CNY trading at the highest level since just above 6.73. The pair has retraced about half of the 2020-2022 drop and a break above 6.8450 would set up a test of the May 2020 high near 7.1777. We do not believe policymakers are too concerned about currency weakness at this stage.

Reports suggest the Reserve Bank of India intervened to support the rupee today. An unnamed official said that the bank will not hesitate to use its foreign reserves of about $600 bin to deter speculators, adding that the bank is seeking an orderly depreciation. Given that India has one of the most tightly controlled FX markets within EM, blaming speculators rings quite hollow. Rather, rupee weakness is being driven by fundamental factors that should continue to weigh on most EM credits. USD/INR traded at a record high near 77.53 and is likely to continue rising despite any ongoing RBI intervention.

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