Dollar Soft Ahead of BOE Decision

May 06, 2021
  • Investor Services
  • U.S. data yesterday were slightly weaker than expected but still show underlying strength in the economy; we have two more clues for April jobs data Friday; Fed’s Williams, Kaplan, and Mester speak; Treasury made its quarterly refunding announcement; Brazil delivered the expected 75 bp hike but also signaled another move of the same magnitude in June. The dollar is little changed ahead of some key U.S. data.
  • BOE is expected to deliver a hawkish hold; U.K. elections are being held today; eurozone data came in firm; Norges Bank kept policy steady but reaffirmed its commitment to hiking rates this year; Czech National Bank is expected to keep rates at 0.25%
  • Lockdowns in Japan will reportedly be extended; diplomatic tensions between China and Australia are picking up; Malaysia delivered a dovish hold, as expected


The dollar is soft ahead of the BOE decision. DXY is lower today after two straight up days. After trading at marginal new high for this bounce yesterday near 91.436, it is now testing the 91 area. Support for the euro held near $1.20, while sterling is trading around $1.39. USD/JPY remains stuck near 109. We continue to look for continued dollar strength on the strong economic outlook (see below) but this will require a more significant turnaround in U.S. yields. Right now, the 10-year yield is trading near the recent lows around 1.56%.



U.S. data yesterday were slightly weaker than expected but still show underlying strength in the economy. First, ADP reported 742k private sector jobs were added in April. This was slightly less than the 850k consensus but still exceptionally high. ISM services for April then came in at 62.7 vs. 64.1 expected and 63.7 in March. Again, slightly lower than expected but still exceptionally high. To keep things in perspective, PMI readings over 60 are very rare and yet the services reading has been there for two straight months. Of note, the employment component rose to 58.8, the highest since September 2018, while prices paid rose to 76.8 from 74. The main details were very strong.

We have two more clues for April jobs data Friday. Consensus now sees 998k jobs added vs. 917k in March, with the unemployment rate falling two ticks to 5.8%. Weekly jobless claims today are expected to show continued improvement in the labor market, with initial claims seen falling to 538k from 553k the previous week and continuing claims seen falling to 3.62 mln from 3.66 mln the previous week. April Challenger job cuts and Q1 nonfarm productivity (4.2% y/y expected) will also be reported today.

The Fed’s Williams, Kaplan, and Mester speak. All are expected to toe the dovish line except for Kaplan, who continues to push for tapering sooner rather than later. Kaplan is shaping up to be one of the least dovish at the Fed and we think he is the only one to admit to being one of the four "dots" that see a hike before end-2022. Of note, Kaplan is not a voter in either 2021 or 2022 but becomes one in 2023 and so his 2022 "dot" is a moot one. That said, we suspect more FOMC members will shift closer to Kaplan’s view in the coming weeks and this would be dollar-positive. The Fed also releases its Financial Stability Report today.

The U.S. Treasury made its quarterly refunding announcement. As most expected, it kept its quarterly auction of long-term debt next week unchanged at $126 bln. This was the first time in over a year that the quarterly refunding hasn’t increased, suggesting that government financing needs may have peaked. $58 billion of three-year notes on May 11, $41 billion of 10-year notes on May 12, the same as last quarter, and $27 billion of 30-year bonds on May 13, unchanged versus February. The Treasury Borrowing Advisory Committee, a group of major dealers and investors, said in an accompanying statement that the government should continue to lengthen the average maturity of debt to above its historical range.

The Brazilian central bank (BCB) delivered the expected 75 bp hike yesterday, but also signaled another move of the same magnitude is coming in June. The bank was explicit in saying they expect a similar move in the next meeting. It also kept the language on “partial normalization,” and is trying to retain optionality in terms of the extent of the cycle. The hope, we presume, is that the front-loaded cycle will ultimately mean a shorter cycle. But this depends on the real cooperating, which it has so far. We expect BRL to continue gaining some short-term traction on more favorable rate differentials, but the medium-term prospects for Brazilian assets still hinges on the fiscal outlook.


Bank of England is expected to deliver a hawkish hold. The Monetary Policy Report will contain upgraded growth forecasts. Rates are expected to remain steady but some expect the bank to announce tapering of its asset purchases. Why? The bank is currently buying GBP4.4 bln of bonds per week. So far, it has bought a total of GBP787 bln and plans to continue the purchases until year-end. At the current pace, it would hit the GBP875 bln limit by mid-September and so some technical tapering is needed. That said, the bank has not really been talking about tapering since February, when Ramsden’s comments were seen as coming too soon. To us, a more logical sequence would be for the BOE to flag imminent tapering today and then follow through at the next meeting June 24. Of note, the short sterling futures strip suggests significant odds of the first hike in Q1 2022 and fully priced in by Q3 2022. GBP tends to strengthen on BOE decision days. Of the last six dating back to August, cable has gained on five of them. It is up modestly today and may extend this streak.

Ahead of the BOE decision, the U.K. reported final April services and composite PMIs. Services came in at 61.0 vs. 60.1 preliminary, while the composite PMI rose to 60.7 from 60.0 preliminary. Construction PMI will be reported tomorrow. Data are likely to continue coming in strong in Q2 as the economy opens, giving the BOE more confidence in tapering in June.

U.K. elections are being held today. Local and mayoral elections will help determine whether the recent scandals have hurt Prime Minister Johnson’s Tory party. In addition, elections in Scotland and Wales may help decide the fate of the U.K. itself. Polls suggest pro-independence parties in Scotland could win a potential super-majority in the local parliament, which would seem to raise the odds of another independence referendum. Lastly, there is a special by-election for a parliamentary seat in the town of Hartlepool in Northern England. Of note, it is rare for the ruling party to win a by-election.

Eurozone data came in firm. Germany factory orders were reported. Orders rose 3.0% m/m, double the expected 1.5% and up from a revised 1.4% (was 1.2%) in February. Elsewhere, eurozone retail sales were reported. Sales rose 2.7% m/m, nearly double the expected 1.6% and follows a revised 4.2% (was 3.0%) in February. Data are certainly welcome but we still do not believe that the divergences in economic performance with the US will narrow in Q2 or Q3.

Norges Bank kept policy steady, as expected. Rates were kept at zero but the bank reaffirmed its commitment to start hiking rates in the “latter half of 2021.” The bank noted that infection rates have fallen back recently and this has allowed the reopening of the economy to begin. With much of Norway's adult population expected to be vaccinated by the end of summer, "This suggests that economic activity will pick up through the year." With the Swedish Riksbank signaling that it is likely on hold through Q2 2024, we see scope for the NOK/SEK cross to reach the 2020 high near 1.0715 and then potentially the 2019 high near 1.1055.

Czech National Bank is expected to keep rates at 0.25%. The bank has been walking back its forward guidance for three rate hikes this year. Last week, central bank board member said “Three hikes this year would only be realistic if we saw an uncontrolled economic recovery, which I don’t assume will happen.”


Lockdowns in Japan will reportedly be extended. Tokyo Governor Koike said he would soon request an extension of the state of emergency from Prime Minister Suga. The current state of emergency is scheduled to end May 11. Press reports suggest the central government is considering extending the state of emergency for not only Tokyo but also the prefectures of Osaka, Kyoto, and Hyogo by at least two weeks and up to a month. Other reports suggest the prefectures of Hokkaido and Fukuoka may also adopt stricter measures. This would dash hopes of any significant recovery in Q2 and this will instead be pushed into H2. Of note, the Summer Olympics that are scheduled to start in July are fast approaching.

Diplomatic tensions between China and Australia are picking up, impacting local markets and iron ore prices. The Chinese government suspended activities “indefinitely” from the bilateral trade and investment initiative called the Economic Dialogue. Frictions between the two nations date back many years and span a myriad of issues, but the proximate cause of China’s latest retaliatory move was Australia’s decision to cancel some investment agreements from the Belt and Road Initiative.

Bank Negara Malaysia delivered a dovish hold, as expected. It kept rates steady at 1.75% but warned that “the balance of risks to the growth outlook remains tilted to the downside” due to the pandemic. The bank added that “While the recent re-imposition of containment measures in select locations will affect economic activity in the short term, the impact will be less severe as almost all economic sectors are allowed to operate.” This suggests the bank is on hold for now. Indeed, consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. We concur.

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