Risk-Off Impulses Add to Dollar Gains

September 20, 2021
  • The dollar comes into this key week with strong upward momentum; the dollar is also benefitting from risk-off impulses emanating from China; Canada goes to the polls today
  • ECB asset purchases for the week ending September 17 will be reported; Russian parliamentary elections went as expected
  • The Evergrande saga is leading to heightened concerns about the Chinese financial system and contagion to broader financial markets; we are firmly on the side of expecting strong government intervention; LDP leadership candidate Sanae Takaichi said she wants the Bank of Japan to increase its focus on jobs; iron ore continues to trade heavy after headlines about further restrictions by Chinese regulators

The dollar is firing on all cylinders as it benefits from strong U.S. data as well as growing risk-off impulses. DXY is nearing a test of the August 20 high near 93.729. After that is the November 2020 high near 94.302 and then the September 2020 high near 94.742. The euro is on track to test of the August 20 low near $1.1665 and after that is the November 2020 low near $1.1605. USD/JPY is trading back below 110 due to some safe haven bid but for now, the dollar remains the currency of choice. We believe a hawkish Fed and ongoing China risks will help keep this dollar rally going.


The dollar comes into this key week with strong upward momentum. Six major central banks meet this week and are likely to underscore the monetary policy divergence theme that we believe favors the dollar. The U.S. economy remains firm and wage and price pressures are rising and so the Fed should feel comfortable with its ongoing path to tapering. Norges Bank is likely to become the first major central bank to tighten. On the other side, SNB, Riksbank, and BOJ were all fighting deflationary risks before the pandemic and will be reluctant to remove accommodation anytime soon. The BOE falls somewhere in between. While many expect BOE lift-off in early 2022, we are skeptical as the weak data continue to pile up. We are hopeful that with all this event risk, markets are finally jolted out of recent ranges.

The dollar is also benefitting from risk-off impulses emanating from China (see below). As such, we appear to be back in “dollar smile” territory. That is, the dollar will tend to gain on good news about the U.S. and will also tend to gain from risk-off trading.

Canada goes to the polls today. The latest poll suggests Trudeau’s Liberals are likely to win 155 of the 338 seats in the House of Commons while the opposition Conservatives are likely to win 119. Failure to win 170 seats would leave us back where we started, with Trudeau leading a minority government. In some ways, this may be the outcome that makes the most sense. That is, voters will reward Trudeau’s handling of the pandemic and allow him to stay in power but will punish him for calling an election in the middle of the pandemic and deny him an outright majority. If so, then there are basically no implications for policy or for Canadian asset markets.


ECB asset purchases for the week ending September 17 will be reported. This weekly number has taken on more importance after the ECB last week announced that it would aim for a more “moderate” pace going forward. Net purchases were EUR14.7 bln for the week ending September 10 vs. EUR16.7 bln for the week ending September 3 and EUR11.5 bln for the week ending August 27. The ECB had been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March but they have fallen a bit short in recent weeks due to thin market conditions over the summer. Now, it will likely take a few more weeks to figure out what the new pace will be.

The Russian parliamentary elections went as expected, but with low turnout and worse results than the previous election. President Putin’s party, United Russia, is on track to win with 47% (down from 54% support in the 2016 elections). The Communist Party garnered just over 21%, and the Nationalist LDPR with 9%, though both tend to align with the Kremlin. Turnout was a meager 47%. Nothing changes in Russia, in our view. Elections come and go, and at best show a slow dwindling of Putin’s power, but nowhere near the point we should be discussing a transition of power. The next presidential election is scheduled for 2024 and the recent constitutional reforms will allow Putin to run for two more terms despite having effectively been in power since 2000. Of note, Putin will be 72 in 2024.


The Evergrande saga is leading to heightened concerns about the Chinese financial system and contagion to broader financial markets. Aside from Hong Kong listed stocks, the price action across EM has not been too dramatic, looking just like any risk-off event (i.e. non-China induced). Our concerns about the Evergrande situation are twofold (see price action below). First, getting from here to the other side of the inevitable restructuring could be very turbulent. Second, the path chosen might be just to “kick the can down the road,” or even worse, to deepen the fragilities in China’s credit risk nexus. We think that Bloomberg columnist John Authers best described the situation by juxtaposing the LTCM and Minsky moments. For this current episode, the main difference is that the former was resolved through heavy-handed action by authorities, while the latter implies that Evergrande is a Lehman and authorities will opt to let it collapse instead of accepting the moral hazard a bailout implies.

We are firmly on the side of expecting strong government intervention. Whether it will work and avoid a crisis like subprime in the U.S. is impossible to answer at this point, but here is the good news: investors and regulators were all well aware of the situation for a long time – not just of Evergrande, but of the entire risk complex in the property and wealth management products. Now it’s time to define what “too big to fail” really means for China.

With many countries closed across Asia, much of the price action has been in in Hong Kong shares. Chinese property developers are taking another leg lower, as expected. Looking at stocks listed in Hong Kong, the real estate subsector is down over 5% with developer Country Garden down -8%, and Evergrande shares down 2.6%. But the greatest bloodshed came from Sinic Holdings, down 80%. Across Asia, indices are down the most in Malaysia (-1.2%) but as dramatic in other EM countries in the region. In FX, PHP and MYR are the worst performers, both down 0.5% against the dollar.

LDP leadership candidate Sanae Takaichi said she wants the Bank of Japan to increase its focus on jobs. She stressed that the BOJ should continue to pursue its goal of 2% inflation whilst also emphasizing employment indicators and the labor market. She said “It’s not like the BOJ is completely ignoring employment, but I would want them to look at it more closely.” If so, the BOJ would come under a dual mandate like the Fed. Such a shift could keep BOJ policy looser for longer, much as it has here in the U.S. currently. That is, a pure inflation target would likely have led the Fed to hike rates already, but the addition of the full employment mandate will keep rates at current levels for much longer.

Takaichi is considered a long-shot for the LDP leadership. A Mainichi survey taken September 19 shows former Foreign Minister Fumio Kishida is favored by more than a third of the 382 LDP lawmakers. About 25% support vaccine czar Taro Kono, 20% support Takaichi, and less than 10% support Seiko Noda. In a separate popular poll, Kono was favored to be the next prime minister by 18% of respondents, followed by Takaichi with 12%. Kishida was fourth with 5%. If popular opinion doesn’t shift, then the LDP is faced with a tough decision. Can it choose a leader that is not very popular with the voters? Stay tuned.



iron ore continues to trade heavy after headlines about further restrictions by Chinese regulators. It’s quite clear that the government is serious about further restrictions on production to reduce carbon emissions and improve air quality ahead of next year’s Olympics. Futures traded in Singapore are off nearly 10% on the day, according to Bloomberg. Note that low volumes due to the Chinese markets holiday likely contributed to the exaggerated intra-day move. We have been writing about the negative impact of lower iron ore prices on the Australian economy and it just keeps getting worse. AUD is on track to test the August 20 low near .7105. After that is the November 2020 low just below .70.

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