Dollar Soft as Markets Await Fresh Drivers

May 11, 2021
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The debate about unemployment benefits is heating up after last week’s big miss on jobs; heavy US Treasury issuance this week starts off with a $58 bln sale of 3-year notes today; Fed speakers will remain plentiful; Brazil reports April IPCA inflation
  • The debate about unemployment benefits is heating up after last week’s big miss on jobs; heavy US Treasury issuance this week starts off with a $58 bln sale of 3-year notes today; Fed speakers will remain plentiful; Brazil reports April IPCA inflation

  • ECB Executive Board member Schnabel predicted that German inflation could temporarily climb above 3%; German ZEW index rose by much more than expected in May; we will get more details of the ECB’s asset purchases for the week ending May 7; Hungary and Czech Republic CPI data confirm that inflation risks are rising in Eastern Europe

  • Japan reported strong March household spending; Australia signaled that fiscal policy is set to remain expansionary in its FY2021-22 budget; China-Australia relations remain tense; China reported April CPI and PPI

The dollar remains soft ahead as markets await fresh drivers. DXY is down for the fourth straight day and is trading just above 90. It is on track to test the February 25 low near 89.683. The euro is trading firmly above $1.21 and is on track to test the February 25 high near $1.2245. Sterling is trading above $1.41 and is on track to test the February 24 high near $1.4235. Lastly, USD/JPY remains heavy and continues to trade below 109. Until we see a significant turnaround in U.S. yields, the greenback is likely to remain under pressure. The US 10-year yield is currently trading around 1. 60%.

 

AMERICAS

The debate about unemployment benefits is heating up after last week’s big miss on jobs. Anecdotal evidence suggests some low wage workers are finding it more lucrative to stay home and collect unemployment benefits than it is to re-enter the workforce. We must stress that the plural of anecdote is data. There has not been any hard data showing this is a widespread problem. Yet the issue has become enough of a flashpoint that President Biden warned anyone not to game the jobless-benefit system, which currently offers an extra $300 a week through September thanks to the most recent stimulus bill. Biden said that anyone offered a suitable job “must take the job or lose their unemployment benefits.”

Heavy US Treasury issuance this week starts off with a $58 bln sale of 3-year notes today. This will be followed by $41 bln of 10-year notes to be sold tomorrow and $27 bln of 30-year bonds to be sold Thursday for a grand total of $126 bln this week. Keep an eye on the bid-to-cover ratio and indirect bidders (mostly foreign demand). At the last 3-year auction, these demand metrics came in at 2.32 and 51.1%, respectively.

Fed speakers will remain plentiful. Williams, Brainard, Daly, Bostic, Harker, and Kashkari all speak today. March JOLTS job openings will be reported and are expected at 7500k vs. 7367k in February.

Brazil reports April IPCA inflation. Headline inflation is expected to pick up to 6.74% y/y from 6.10% in March. If so, it would be the highest since November 2016 and further above the 2.25-5.25% target range. No wonder COPOM just hiked rates 75 bp to 3.5% last week and flagged another such hike at its next meeting June 16 that would take the rate to 4.25%. Expectations are for an aggressive easing cycle that takes the policy rate to 6.0% by Q3 2022. The exchange rate is the wild card, as continued strength may alleviate some of the pressure on the central bank to tighten.

 

EUROPE/MIDDLE EAST/AFRICA

ECB Executive Board member Schnabel predicted that German inflation could temporarily climb above 3%. She noted prices will rise as the economy recovers from the pandemic but views it as transitory, adding that the bank will look beyond such volatility. She said “What we see is that very pronounced fluctuations in inflation have emerged because of the pandemic. Our monetary policy strategy is oriented to the medium term, and this means we look through these short-term fluctuations.” This is a welcome relief from the days of Trichet, when the bank started tightening cycles not once, but twice going into two different crises. That said, this is a reminder that what the Fed is facing in terms of policy is by no means unique. Virtually every major DM central bank is moving to some sort of average inflation targeting framework so as not to hike too soon and choke off the recovery. Indeed, Governing Council member Villeroy downplayed any talk of tapering PEPP.

German ZEW index rose by much more than expected in May. The expectations component rose to a 21-year high of 84.4 vs. 72.0 expected and 70.7 in April. This shows data is starting to capture optimism about the vaccine rollout. About one-third of the population now have taken one dose of the vaccine. The current situation component came in at -40.1 vs. -41.6 expected and rising from -48.8 in April. Note that ZEW expectations for the entire eurozone came in at 84.0 vs. 66.3 in April.

We will get more details of the ECB’s asset purchases for the week ending May 7. Net purchases were reported yesterday at EUR16.3 bln vs. EUR19 bln for the week ending April 30 and EUR22.25 bln for the week ending April 23. Redemptions will be reported today. They were a sizable EUR7.5 bln the previous week and so gross purchases were EUR26.5 bln for the week ending April 30 vs. EUR25.0 bln for the week ending April 23. 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.

Hungary and Czech Republic CPI data confirm that inflation risks are rising in Eastern Europe. Hungary’s headline inflation came in at 5.1% y/y vs. 4.8% expected and 3.7% in March. It is the highest since November 2012 and well above the 2-4% target range. However, the bank has flagged this spike as temporary. At last week’s meeting, the bank acknowledged rising inflation but said it is focused on second round effects. Next policy meeting is May 25 and no change is expected then. Elsewhere, Czech headline inflation came in at 3.1% y/y vs. 2.7% expected and 2.3% in March. It is the highest since September and above the 1-3% target range. Last week, the bank delivered a hawkish hold. Rates were kept at 0.25% but the bank signaled lift-off was likely by “roughly the middle of this year.” Next policy meeting is June 23 and a 25 bp hike seems very likely.


ASIA

Japan reported strong March household spending. Spending jumped 6.2% y/y, more than quadruple the 1.5% expected and well above the -6.6% reading for February. Real cash earnings unexpectedly rose 0.5% y/y in March and so spending clearly got a boost. Working against that in the coming months will be pandemic-related restrictions. Indeed, Q2 is shaping up to be much weaker than expected to due renewed and extended states of emergency in Japan’s major prefectures. This supports our belief that Prime Minister Suga will announce another fiscal package over the summer to boost his sinking popularity.

Australia signaled that fiscal policy is set to remain expansionary in its FY2021-22 budget that begins in June. A deficit of -AUD106.6 bln (-4.3% of GDP) is forecast vs. -AUD80 bln expected due to higher outlays for infrastructure, care for the aged care, and low- and middle-class tax relief. The budget statement stressed that “The government will secure the economic recovery by taking further action to support private sector-led growth and drive down the unemployment rate. Economic growth is essential to maintaining a strong and sustainable fiscal position.” Of note, Treasury based its estimates on the assumption that iron ore will fall back to $55 a ton by the end of March 2022 whilst acknowledging “upside risks” for commodity prices. Of note, Treasury forecasts the deficit narrowing to -4.1% of GDP in FY2022-23, -3.1% in FY2023-24, and -2.3% in FY2024-25. Net debt is expected to peak at -40.9% of GDP in FY2024-25. For now, the RBA is on hold while Treasury does the heavy lifting. However, we think the expansionary fiscal outlook raises risks that the RBA extends QE in order to keep monetary policy accommodative..

China-Australia relations remain tense. Two of China’s liquefied natural gas (LNG) importers have reportedly been told to avoid buying new shipments from Australia over the next year. However, the two are relatively small players. Larger state-owned importers that account for nearly 90% of the nation’s LNG purchases haven’t received any guidance and plan to continue buying from Australia. China imports more than 40% of its LNG from Australia, totaling AUD13 bln ($10 bln) and making it hard to replace. As in other retaliatory actions taken by China, this one also seems more for show than for substance. However, tempers on both sides could flare at any moment and lead to further escalation and so this bears watching.

China reported April CPI and PPI. CPI rose 0.9% y/y vs. 1.0% expected and 0.4% in March, while PPI rose 6.8% y/y vs. 6.5% expected and 4.4% in March. Food prices (especially pork) are helping to keep headline CPI inflation low. The jump in PPI was the highest since October 2017 and due in large part to higher commodity prices, especially iron ore. However, a steady recovery in domestic demand is also helping and suggests upside risks to CPI going forward. That said, we do not think policymakers are focused on inflation right now. Rather, it seems clear that the focus remains on deleveraging and rebalancing, with a healthy dose of regulatory oversight thrown in. Still, as the world’s second largest economy, there is little doubt that the PPI print is feeding into global concerns about rising inflation.

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