Dollar Slide Continues in Absence of Fresh Drivers

April 20, 2021

US bond yields are creeping higher;  the Trudeau government released its 2021 budget; BOC decision will be announced tomorrow; Peruvian assets are underperforming after polls show leftist candidate Pedro Castillo leading the second-round presidential race
Weekly ECB asset purchases were reported; the ECB’s quarterly lending  survey contained some worrisome signs; U.K. reported better than expected labor market data
Japan reported strong March convenience store sales; RBA released its minutes; Taiwan reported strong March export orders

The dollar downdraft continues with DXY down for the seventh consecutive session. There are many factors driving this dip in the dollar, but the strongest proximate causes are probably lower US yields and prospects of narrowing vaccination gap with Europe. We do not think these drivers will be sustained but for now, the momentum is clearly against the dollar.  Since the start of the month, the euro, Aussie and yen have appreciated about 2.5% against the dollar. USD/JPY fell to a one-month low near 107.95 as risk aversion saw the JPY bid across the board while GBP and EUR made their way to $1.4010 and $1.2070 highs, respectively, leaving the DXY at a 2-month low near 91.  In the EM space, USD/CNY fell back below 6.5, back to mid-March levels.


US bond yields are creeping higher.  The 10-year yield traded near 1.63% today, the highest since last Thursday and above the 1.53% low posted last week.  However, it has done the dollar no favors as it is trading largely flat on the day.  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.  Bond markets await a $24 bln 20-year bond auction tomorrow and a $18 bln 5-year TIPS auction Thursday. 

The Trudeau government released its 2021 budget.  As widely leaked, the government introduced CAD101.4 bln ($80.9 bln) of new measures over the next three years.  Key details include establishing a national daycare system, extending subsidies for wages and rent through late September, and introducing a temporary wage subsidy program for companies of up to CAD1,129 per week for new hires.  The fiscal deficit is seen falling to -CAD154.7 bln in FY2021 (-6.4% of GDP) from -CAD354.2 bln for FY2020 that just ended March 31 (-16.1% of GDP).  The gap is expected to fall to -CAD30.7 bln by FY2025 (-1.3% of GDP).  Federal debt is expected to peak at 51.2% of GDP in 2021 before declining to 49.2% of GDP by 2025. 

Bond issuance will decline to CAD286 bln in FY2021 from CAD374 bln in FY2020.  The government plans to issue more than 40% of its bonds in maturities of 10 years or more, up from 15% pre-pandemic. That includes a re-opening of 50-year issuance.  As a result, the average term to maturity for domestic debt is seen rising to levels not seen in more than 40 years.  Lastly, the government plans to issue its first ever green bond this FY.  The budget now goes to parliament, where Trudeau’s Liberals need the support of one opposition party to pass it.   Failure to pass would trigger fresh elections ahead of the October 2023 deadline.

The Bank of Canada decision will be announced tomorrow. With fiscal policy doing the heavy lifting now, the BOC is likely done easing and will continue to remove its emergency measures in the coming months.  Some expect it to begin tapering its asset purchases but we think it may be too soon and so a dovish surprise is possible.  The policy rate will remain unchanged at 0.25% while updated macro forecasts will be presented in the quarterly monetary policy report.  We will be sending out a preview later today.   

Peruvian assets are underperforming after polls show leftist candidate Pedro Castillo leading the second-round presidential race. The latest polls show Castillo with 42% support vs. 31% for Keiko Fujimori. Importantly, Fujimori’s rejection rates is far higher at 55% vs. just 33% for Castillo. Castillo tried to ease concerns about nationalization of mining assets or an attempt to change the constitution without a referendum. Still, markets are on edge with the sol coming off 1% against the dollar on a day of broadly strong performance of EM currencies. The final vote happens on June 8, so it’s far from a done deal.


Weekly ECB asset purchases were reported.  The ECB bought a net EUR16.3 bln last week vs. EUR17.1 bln the previous week.  Redemptions will be reported today but the previous week, they were a relatively large EUR4.2 bln, which meant gross purchases were EUR21.3 bln.  Of note, eurozone yields have been creeping higher even as US yields have dropped.  The 10-year Bund yield is currently around -24 bp and nearing the February high near -21 bp, while the 10-year BTP yield is currently around 80 bp and nearing the February high near 84 bp.  We think the ECB will have to accelerate its purchases further if eurozone yields continue to climb. We expect an accelerated pace to be maintained until at least the June meeting, when the ECB will likely reassess its program. 

The ECB’s quarterly lending  survey contained some worrisome signs.  It noted that banks “moderately” tightened credit standards for companies in Q1 even as loan demand from companies and households declined.  Credit standards eased slightly for home purchases but tightened moderately for consumer credit and other lending to households.  However, banks expected net loan demand to increase for both companies and households in Q2.  Of note, banks said that ECB policy measures supported lending conditions, but added that asset-purchase programs and the negative deposit rate were having a negative impact on profitability.  This underscores our long-standing belief that the ECB will not go more negative.  The ECB is expected to deliver no changes at this week’s meeting.

The U.K. reported better than expected labor market data.  February unemployment dropped a tick to 4.9% vs. 5.0% consensus, while the 3-month employment change was -73k vs. -150k expected.  Elsewhere, March jobless claims rose only 10.1k while February was revised to 67.3k from 86.6k previously.  Stronger data reflect the reopening of the U.K. economy.  As that continues along with vaccinations, Q2 and Q3 growth are likely to remain elevated. That said, the Bank of England is in no hurry to tighten policy.  The departure of Chief Economist Haldane after the June meeting removes one of the most hawkish MPC members and so his replacement will be key.  BOE tightening expectations have been pared back a bit from their peak in mid-March, though the short sterling strip still shows a rate hike fully priced in by Q4 2022.  


Japan reported strong March convenience store sales.  Sales rose 1.9% y/y and was the first positive reading since February 2020.  March supermarket sales will be reported Wednesday department store sales will be reported Friday.  Both of those series have also been depressed and so the positive convenience store readings offer some hope for a recovery.  All of these series will offer some clues for March retail sales, which will be reported April 28.  Looking ahead, however, renewed restrictions in April due to rising virus numbers will be a headwind in Q2.

Reserve Bank of Australia released its minutes.  At the April 6 meeting, all policy settings were left unchanged as they “continued to support the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise.”  With regards to the red-hot housing market, “Members agreed that it would be important to watch carefully for increased risk-taking by lenders.” The minutes reiterated that a decision on whether to maintain the April 2024 bond as its YCC target or shift to the next maturity will be made later this year.  The bank also noted that wage growth had slowed  “and had been more subdued than in other countries.”  Overall , the minutes suggest the bank is in no hurry to change policy one way or the other.  However, the bond market was disappointed with its hesitancy to extend YCC as the November 2024 yield rose 4 bp to 0.32%, well above the April 2024 yield that’s trading at the YCC target of 0.10%.  Next RBA decision is May 4, which will be accompanied by its quarterly Statement on Monetary Policy that updates its macro forecasts. 

The PBOC left its loan rates unchanged, as expected. The 1- and 5-year loan prime rates stand at 3.85% and 4.65%, respectively, where they have been for a year now. With the economic backdrop still strong, we still think some form of tightening is on the way, but it will happen though more indirect means than the LPR. Froth in the equity and real estate markets still seem to official’s first target.
Bank Indonesia kept rates steady at 3.5%, as expected.  Officials reduced their growth forecast for the year by 0.2 ppts to a range of 4.1-5.1%, and inflation remains below the target at 1.37% y/y as of March.  The bank has been on hold since the last 25 bp cut back in February.  It seems that concerns about further currency weakness are holding them back from providing further accommodation.  We agree with this stance. The rupiah has depreciated about 4% since mid-February, one of the worst performing currencies in the region. But more importantly, there is no sign of improving demand from foreign investors for local assets. There has been some $1.2 bln of outflows from government bonds this year. As we have pointed out before, the central bank now holds more local bonds than foreigners for the first time, an important milestone and reflective of deteriorating sentiment.  Until foreign capital flows pick up, we think Bank Indonesia will remain on hold.
Taiwan reported strong March export orders.  Orders jumped 33.3% y/y, slightly shy of the expected 34.9% and down from 48.5% in February.  Exports will continue to benefit from the regional recovery as well as surging global demand for semiconductors.  Last Friday, the U.S. Treasury put Taiwan, Switzerland, and Vietnam on notice over their FX practices but refrained from labeling any of them a currency manipulator.  This supports our view that the Biden administration will take a less confrontational approach with its major trading partners.  Of note, Taiwan urged the U.S. to temporarily suspend its currency manipulation analyses during the pandemic.    

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