Dollar Weakens in the Absence of Fresh Drivers

May 18, 2021
  • With Fed officials remaining dovish as data paint a mixed picture for the U.S., markets are taking the dollar lower; Kaplan speaks today; Fed manufacturing surveys for May have started to roll out; Chilean assets have come under heavy pressure with the strong performance of far-left parties in the Constitutional Assembly elections
  • More details of the ECB’s asset purchases for the week ending May 14 will be reported; U.K. reported solid labor market data; Hungarian central bank Deputy Governor Virag signaled tightening is on the way
  • Japan reported soft Q1 GDP data; RBA minutes were released; with the RBA highlighting a data-dependent path, all eyes turn to April jobs data that will be reported Thursday

The dollar remains under pressure. DXY is down for the third straight day, trading below 90for the first time since late February and nearing the February 25 low near 89.683. After that is the January 6 low near 89.209. The euro is back above $1.22 and is on track to test the February 25 high near $1.2245, while sterling is back above $1.42 and is on track to test the February 24 high near $1.4235. USD/JPY is trading heavy again and is testing the 109 level. With no major U.S. data this week, markets continue to sell the dollar.



With Fed officials remaining dovish as data paint a mixed picture for the U.S., markets are taking the dollar lower. Q1 was a story of U.S. economic outperformance and upside surprises, while Q2 has so far been quite the opposite. Yet we can’t help but think that markets are getting too pessimistic on the U.S. and too optimistic on Europe. The pendulum of sentiment is always swinging and it seems to be swinging too far against the U.S. right now. Yet there is little on the short-term horizon to push sentiment back towards the dollar and so we are prepared for further losses ahead. Until we see a shift in the Fed’s stance regarding potential tapering and/or evidence that inflation is more than transitory, U.S. yields are likely to remain stuck near current levels.

Kaplan speaks today. Of note, Kaplan remains the most hawkish at the Fed. Last Friday, he again stressed the need to talk about tapering sooner rather than later. We assume that he brought this up at the April FOMC meeting, but the big question is whether any other Fed officials are starting to line up with Kaplan. We’ll find out tomorrow when FOMC minutes will be released. As our recent Fed piece here argues, the road to tapering will most likely begin with the minutes.

Fed manufacturing surveys for May have started to roll out. Empire survey came in at 24.3 vs. 23.9 expected and 26.3 in April. While down, this is still is the second highest reading for this cycle. In other words, the manufacturing sector may be slowing a bit in May but it is still expanding at a good clip. Philly Fed survey should show the same thing Thursday, as it's expected at 41.9 vs. 50.2 in April. Meanwhile, April building permits and housing starts will be reported today.

Chilean assets have come under heavy pressure with the strong performance of far-left parties in the Constitutional Assembly elections. The ruling coalition led by Pinera received 37 of 155 seats, falling short of the 1/3 support needed to block elements of the new Constitution. This increases the risk that extreme elements could get through, as many of these seats were taken by the far-left parties. Adding to the right’s woes, the Communist Party won the race for the mayor of Santiago. The Chilean peso fell 2.3% against the dollar yesterday and the main stock index was down by a whopping 9.3%. Today, Chile reports Q1 GDP data. GDP is expected to grow 3.8% q/q vs. 6.8% in Q4. Last week, the central bank kept the policy rate at 0.5% and added that it “will be kept at its minimum of 0.5% for as long as it is deemed necessary for the recovery of the economy to take hold.”



More details of the ECB’s asset purchases for the week ending May 14 will be reported. Net purchases were EUR19.0 bln vs. EUR16.3 bln for the week ending May 7. Redemptions will be reported today and were a sizable EUR8.3 bln for the week ending May 7. As such, gross purchases were EUR24.6 bln for that week vs. EUR26.5 bln for the week ending April 30. The 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.

U.K. reported solid labor market data. Jobless claims came in at -15.1k for April vs. a revised -19.4k (was +10.1k) in March. The 3 month/3 month change in employment was 84k in March vs. 50k expected and -73k in March, pushing the unemployment rate down a tick to 4.8%. Bank of England officials remain bullish on the U.K. economic outlook as lockdowns end, and the recent data support this. With indoor hospitality now allowed for the first time in five months, the economy should continue to benefit. Of note, the BOE now expects unemployment to peak at around 5.4% in Q3 vs. 7.9% previously.

Hungarian central bank Deputy Governor Virag signaled tightening is on the way. He said that hikes could be seen as early as the June 22 meeting given rising inflation pressures. This would be the first rate hike since 2011. It seems that the bank may embark on a series of small hikes of 15 bp along with phasing out of the government bond purchasing program. The bank next meets May 25 and is likely to provide more detailed forward guidance then. On the data front, Q1 preliminary GDP rose 1.9% q/q, well above the -0.1% expected. In addition, Q4 was revised higher twofold to 2.8% q/q. The forint appreciated over 1% against the euro over the last two sessions, outperforming most EM currencies, and the 10-year bond yield was up over 10 bp. The 10-year spread of Hungarian bonds over equivalent German bunds is at its widest since the start of the pandemic, rising significantly faster than that of Poland.



Japan reported soft Q1 GDP data. GDP contracted -1.3% q/q vs. -1.1% expected and +2.8% in Q4 and underscores the impact of the pandemic restrictions. Q2 was supposed to see a sharp recovery but renewed restrictions suggest downside risks and possibly another quarter of economic contraction. Private consumption fell -1.4% q/q vs. -1.9% expected, business spending fell -1.4% q/q vs. +0.8% expected, inventory accumulation contributed 0.3% q/q vs. 0.2% expected, and net exports subtracted -0.2% q/q, as expected. The BOJ is on hold for now but we still expect another fiscal package over the summer as downside risks build and Suga’s popularity wanes ahead of October elections.

RBA minutes were released. At the May 4 meeting, the bank delivered a dovish hold. All policy settings were left unchanged and the RBA repeated existing forward guidance that rate hikes won’t be seen until 2024 “at the earliest.” Minutes show “The board remained willing to undertake further bond purchases if doing so would assist with progress towards the bank’s goals of full employment and inflation.” Furthermore, the bank said “Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia.” The RBA noted that in order for inflation to move back to the 2-3% target range, wage growth would need to be “sustainably above 3%, which was well above its current level.” 

With the RBA highlighting a data-dependent path, all eyes turn to April jobs data that will be reported Thursday. Consensus sees 20k jobs added vs. 70.7k in March, with the unemployment seen steady at 5.6%. In the past, the RBA has said a 4% unemployment rate is needed to generate significant wage pressures. Preliminary April retail sales and preliminary May PMI readings will be reported Friday. Sales are expected to rise 0.5% m/m vs. 1.3% in March.

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