Dollar Soft Ahead of ECB Decision

April 14, 2022

March PPI data suggests price pressures are far from topping out; yet bonds continued to rally after the PPI data; Fed tightening expectations have fallen despite the inflation data; retail sales data will be important; BOC held a press conference and an FOMC meeting broke out
ECB is expected to keep policy steady but beware of a hawkish tilt; ECB tightening expectations remain heightened; Sweden reported higher than expected March CPI; Riksbank tightening expectations have moved up; Turkey kept rates steady at 14.0%, as expected
Australia reported March jobs data; the report is unlikely to impact RBA policy; Singapore delivered a hawkish surprise; Korea hiked rates 25 bp to 1.5%, as expected

The dollar is down as market positioning continues to reverberate across the rates markets.  DXY is down for the second straight day after nine straight up days and is trading near 99.68. With the U.S. bond market in the midst of a short-covering rally (see below), the dollar is clearly feeling some negative spillover and the moves are likely exaggerated by position skew.  Between the likely return of risk-off impulses and the hawkish Fed outlook for tightening, we believe the dollar uptrend remains intact and should resume after this positioning washout ends.  The euro is trading back above $1.09 ahead of the ECB decision and could get another leg up from an expected hawkish tilt (see below). The relentless rise in USD/JPY has stalled after it traded at a new cycle high near 126.30 yesterday.  Until the BOJ changes its ultra-dovish stance, the yen is likely to continue weakening.  Sterling had an outside up day yesterday that points to further gains.  It is trading at the highest since April 5 at just above $1.31. 


March PPI data suggests price pressures are far from topping out.  Headline came in at 11.2% y/y vs. 10.6% expected and a revised 10.3% (was 10.0%) in February, while core came in at 9.2% y/y vs. 8.4% expected and a revised 8.7% (was 8.4%) in February.  Yesterday, March CPI data came in mixed.  Headline came in a tick higher than expected at 8.5% y/y vs. 7.9% in February while core came in a tick lower than expected at 6.5% y/y vs. 6.4% in February.  All of these readings are new cycle highs and have likely cemented a 50 bp hike at the May 3-4 FOMC meeting. 

Yet bonds continued to rally after the PPI data.  Reports suggest the drop in rates was due largely to short-covering and positioning, particularly for the 2-year UST.  More specifically, there were reportedly large block trades executed in 2 -year UST futures contracts, suggesting that we saw an unwinding of short positions rather than a buildup in significant long positions.  The 2-year yield traded as low as 2.27% yesterday before recovering to 2.33% currently but this is well below this month’s cycle peak near 2.60%.  The 10-year yield traded as low as 2.64% yesterday before recovering to 2.69% currently but this too is well below this week’s cycle peak near 2.83%.  With inflation expectation lagging somewhat, however, the real 10-year yield still managed to rise to -0.13%, the highest since March 2020 and poised to move into positive territory for the first time since before  the pandemic.  

Fed tightening expectations have fallen despite the inflation data.  WIRP suggests a 50 bp hike at the May 3-4 meeting is fully priced in, while odds of another 50 bp hike at the June 14-15 FOMC meeting are around 80%.  Looking ahead, swaps market is pricing in nearly 250 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%, down from 3.25% at the start of the week.  We continue to see room for the expected terminal rate to move higher again if inflation proves to be even more stubborn than expected.  Williams, Mester, and Harker speak today.  

Retail sales data will be important.  Headline is expected at 0.6% m/m vs. 0.3% in February, while ex-autos is expected at 1.0% m/m vs. 0.2% in February.  The so-called control group used for GDP calculations is expected at 0.1% m/m vs. -1.2% in February.  For now, consumption is holding up despite the big hit to household spending power from high inflation.  Can this be sustained even as the Fed embarks on an aggressive tightening cycle?  Stay tuned.  March import/export prices, weekly jobless claims, February business inventories, and preliminary April University of Michigan consumer sentiment will also be reported.

Bank of Canada held a press conference and an FOMC meeting broke out.  The bank hiked rates 50 bp to 1.0%, as expected, and announced an end to QE on April 25.  The accompanying statement was pretty much boilerplate for a central bank in 2022, but Governor Macklem’s press conference afterwards was much more hawkish. He said the bank is prepared to move as forcefully as needed, as it needs to normalize monetary policy relatively quickly.  Macklem sees rates rising to neutral, which the bank estimates to be between 2-3%, but added that it’s also  possible that rates may need to go above neutral.  WIRP suggests a 50 bp hike at the next meeting June 1 is fully priced in.  Looking ahead, swaps market sees the policy rate peaking near 3.0% over the next 24 months.  Updated macro forecasts were released and 2024 was added to the forecast horizon.  February manufacturing and wholesale trade sales will be reported today.


European Central Bank is expected to keep all rates steady but beware of a hawkish tilt.  There will not be updated macro forecasts until the June 9 meeting and so this is widely expected to be placeholder meeting.  Still, the forward guidance will be very important as some ECB officials are hinting that the bank will decide on its next monetary policy steps at that June meeting.  Today would allow the bank to set the table for such a move then.  As things stand, there is no set date for APP to end but we think an announcement is likely in June so that the ECB can position itself for liftoff in Q3. 

Reports suggest the ECB is crafting  a crisis tool that would be activated if eurozone bond yields jump.  The ECB staff is still in the design stage for the program, which means any sort of announcement today is very unlikely.  Instead, we suspect the ECB will announce it at the same time it ends APP in an effort to limit any potential spike in peripheral yields. 

ECB tightening expectations remain heightened.   Some major banks have moved their liftoff calls up to September from December previously.  However, market pricing  is running ahead as WIRP suggests odds of liftoff June 9 are over 50% while July 21 is fully priced in.  Swaps market is pricing in 125 bp of tightening over the next 12 months, with another 75 bp of tightening priced in over the following 12 months.  This still seems way too aggressive to us, especially in light of recent weakness in the real sector data.

Sweden reported higher than expected March CPI.  Headline inflation came in at 6.0% y/y vs. 5.6% expected and 4.3% in February, CPIF came in at 6.1% y/y vs. 5.7% expected and 4.5% in February, and CPIF ex-energy came in at 4.1% y/y vs. 3.7% expected and 3.4% in February.  CPIF was the highest since December 1991 and further above the 2% target.  At the last policy meeting February 10, the Riksbank delivered a dovish hold but Governor Ingves pivoted to a more hawkish stance mid-March when he said the bank is likely to hike rates before its forward guidance for H2 24 liftoff.  When asked about possible 2022 liftoff, he said “we cannot rule anything out.”

Riksbank tightening expectations have moved up.  Next policy meeting is April 28 and WIRP suggests liftoff then is nearly 90% priced in.  At the beginning of March, those odds were nearly zero but rose to around 70% at the beginning of April.  Looking ahead, swaps market sees 175 bp of tightening over the next 12 months followed by another 75 bp over the following 12 months.  While this seems too aggressive to us, it’s clear that pressure on the Riksbank to hike is building.
Turkey central bank kept rates steady at 14.0%, as expected.  The bank said inflation is rising due to negative supply shocks and said it would strengthen its macroprudential policies. No mention of course to its too-loose monetary policy.  To us, inflation shows no signs of easing as PPI rising 115% y/y in March points to significant pipeline price pressures.  At some point, we believe President Erdogan will have to capitulate and allow the central bank to hike rates.  Indeed, swaps market and Bloomberg consensus both see the policy rate starting to rise over the next 3 months.


Australia reported March jobs data.  17.9k jobs were added vs. the consensus 30.0k jobs and 77.4k in February, while the unemployment rate was steady at 4.0% vs. 3.9% expected.  While the headline reading was disappointing, reports suggest hiring was impacted negatively by flooding in the eastern states .  The breakdown was favorable as 20.5k full-time jobs were offset slightly by -2.7k part-time jobs.

The report is unlikely to impact RBA policy.  Even before the data, WIRP suggested very low odds of liftoff at the next policy meeting May 3.  However, liftoff remains fully priced in for the June 7 meeting; at the beginning of March, liftoff was priced in for the August 2 meeting.  Swaps market sees 225 bp of tightening over the next 12 months and another 75 bp over the following 12 months that would see the policy rate peak near 3.25%.

The Monetary Authority of Singapore delivered a hawkish surprise.  As expected, it increased the slope of its S$NEER trading band “slightly” but also recentered it at the prevailing level, which was unexpected.   The MAS also raised its 2022 headline inflation forecast to 4.5-5.5% vs. 2.5-3.5% previously and raised its core inflation forecast to 2.5-3.5% from 2-3% previously.  This is the third straight meeting that the MAS has tightened but the first time since April 2010 that both the slope and center of the S$NEER band was adjusted at the same time.  Singapore also reported Q1 GDP growth at 3.4% y/y vs. 3.8% expected and 6.1% in Q4.

Bank of Korea hiked rates 25 bp to 1.5%, as expected.  However, nearly half the analysts polled by Bloomberg saw no move.  Governor Lee’s successor Rhee Chang-yong has not been confirmed yet and so the meeting was led by acting chairman of the MPC Joo Sang-yong, who said “Big changes have happened since the February meeting.  We concluded the existing inflationary pressures could go on for longer than expected due to the Ukraine situation. So despite the vacancy of the governor position, we had no choice but to respond.”  Of note, headline CPI came in at 4.1% y/y in March, the highest since December 2011 and further above the 2% target.

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