Dollar Remains Soft Post-NFP

May 10, 2021
  • Investor Services
The markets are still digesting the much weaker than expected jobs report from Friday; the debate between markets and the Fed has tilted more towards the latter; today is a quiet day in the U.S. before the upcoming flood of UST issuance and U.S. data
  • The markets are still digesting the much weaker than expected jobs report from Friday; the debate between markets and the Fed has tilted more towards the latter; today is a quiet day in the U.S. before the upcoming flood of UST issuance and U.S. data

  • U.K. government will relax more pandemic rules as planned from May 17; sterling is outperforming after the UK elections delivered another victory for the Tories and no majority for the SNP; the ECB’s asset purchases for the week ending May 7 will be reported

  • Support for Japanese Prime Minister Suga continues to fall; commodity prices continue their strong rally; cryptocurrencies have also been on a tear, though Bitcoin has lagged the recent move

The dollar remains under pressure in the wake of soft jobs data. DXY is trading at the lowest level since February 25 just above 90 and is on track to test that day’s low near 89.683. After that is the January 6 low near 89.209. The euro is on track to test the February 25 high near $1.2245. After that is the January 6 high near $1.2350. Sterling is trading at the highest level since February 25, testing the $1.41 area and on track to test the February 24 high near $1.4235. Lastly, USD/JPY remains heavy and is trading below 109. Until we see a significant turnaround in U.S. yields, the greenback is likely to remain under pressure.

 

AMERICAS

The markets are still digesting the much weaker than expected jobs report from Friday. Taking the long view, we point out that it's just one number that's always subject to a lot of noise. All other indications are that the US economy remains red hot and so we think that the labor market will eventually play catch up. That said, the data are very disappointing and so US yields and USD are likely to remain under pressure near-term. And with the jobs report hanging over markets, we’re not sure this week's data will do much to turn things around.

Indeed, the debate between markets and the Fed has tilted more towards the latter. The huge jobs miss gives credence to the official line that we should look through the coming inflation spike because it’s largely headline driven and that the labor market will take longer to recover. Tapering talk within the Fed is likely to be pushed out further and so it reduces – but by no means dispels – the risk of a near-term taper tantrum. Not much has changed in nominal U.S. rates. The 10-year yield remains stuck below 1.60%. However, inflation expectations are still rising and so real yields continue their journey deeper into negative territory, which remains dollar-negative.

Today is a quiet day in the U.S. before the upcoming flood of UST issuance and US data. There are no data reports and only Evans speaks.

 

EUROPE/MIDDLE EAST/AFRICA

The U.K. government will relax more pandemic rules as planned from May 17. These include allowing pubs and restaurants to serve indoors, indoor socializing, and restarting some international travel. Prime Minister Johnson said ““The road map remains on track, our successful vaccination program continues -- more than two-thirds of adults in the U.K. have now had the first vaccine -- and we can now look forward to unlocking cautiously but irreversibly.” Johnson has previously said his government is on track to lift all lockdown rules from June 21.

Sterling is outperforming after the UK elections delivered another victory for the Tories and no majority for the Scottish National Party. Johnson’s Tory party did well across most of the country, even gaining some traditional Labour seats, and consolidating the party’s comfortable standing. Tories won 14 councils and Labour lost 8. Much of the headlines focused on Scotland, where the pro-independence party SNP fell short of an outright majority by one seat. Party leader Nicola Sturgeon can count on the Green party for support for pushing another independence referendum but the pro-independence parties fell short of a super-majority that some polls had suggested. Still, we don’t think this story is a major risk for markets in the near term. It’s always important to remember that it’s the U.K. parliament, not the Scottish government, that has the authority to call for a referendum.

The ECB’s asset purchases for the week ending May 7 will be reported. Recall that net purchases were EUR19 bln for the week ending April 30, down from EUR22.25 bln for the week ending April 23 but up from a net EUR16.3 bln for the week ending April 16 and EUR17.1 bln for the week ending April 9. Redemptions were a sizable EUR7.5 bln and so gross purchases were EUR26.5 bln for the week ending April 30 vs. EUR25.0 bln for the week ending April 23 and EUR28.4 bln the week ending April 16. This accelerated pace will be maintained until at least the June 10 meeting, when the ECB said it would reassess its program. If yields continue to rise, then the accelerated pace is likely to be extended into Q3, which would be a dovish sign.

 

ASIA

Support for Japanese Prime Minister Suga continues to fall. A poll by broadcaster JNN found 40% of respondents said they supported Suga, down 4.4 percentage points from last month. A whopping 63% said they did not approve of the government’s handling of the pandemic, a 13-percentage point increase from last month. Nearly 60% in a separate Yomiuri poll over the weekend said the Olympic games should be canceled. Suga faces a party leadership election in September and must hold general elections by the end of October. While none of the opposition is weak, Suga’s sliding support could prompt his LDP to replace him. We continue to believe that Suga will push through another stimulus package this summer in an effort to boost his support.

 

COMMODITIES AND ALTERNATIVE INVESTMENTS

Commodity prices continue their strong rally. Iron ore spiked 7% overnight and is up 40% this year, about the same as copper. The moves have been underpinned by the global infrastructure spending from government stimulus plus the move towards greener technologies, including in China. Agricultural commodities are not far behind, with the Bloomberg index up 27%. Oil prices are up just under 1%, supported by disruptions caused by a cyberattack against an U.S. pipeline. Brent is trading at $58.50 per barrel and WTI at $65.5.

Cryptocurrencies have also been on a tear, though bitcoin has lagged the recent move. Bitcoin has been trending higher since last month’s low of around $47K to $58.5K now but struggling to break back above the key $60K level. Much of the recent excitement in the space has been around Ethereum, up 40% this month, as well as other emerging blockchains such as Binance Smart Chain, Cardano, Fantom, and Matic, where transactions are cheaper, leading to migration of many popular decentralized finance (DeFi) protocols. Bitcoin dominance (the market share compared to other cryptocurrencies) has fallen to 43% from 70% at the start of the year.

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