Dollar loses steam as US bond market stabilises
US bond selling has abated and yields in Treasury bonds appear to be range bound for now, with the 10-year
rate oscillating between 1.60% and 1.75%.
The dollar had a mixed week, pulling back against every G10 currency except the pound as well as most
emerging market currencies. We do not expect the rise in interest rates to stop here, but we will need higher
inflation numbers to propel the next move upwards. Meanwhile, expectations of an improvement in the
Eurozone vaccination rollout in the second quarter are driving better sentiment in euro trading. It’s worth
noting the massive clearing out of short USD positions among future speculators, which means that short
covering will not support the dollar in the near-term.
Sterling experienced a mild bout of selling last week, as the PMIs of business activity were revised modestly
lower and the UK’s vaccination rollout slowed as expected following supply disruption of the AstraZeneca
However, its performance so far in 2021 has been quite strong, and given the positive fundamentals and the
overall success of the COVID vaccination programme in the UK we expect this weakness to be short lived. New
daily virus cases and deaths have also both fallen sharply in the UK and restrictions are being eased as
scheduled today with the reopening of pubs, restaurants, shops and gyms. Some near-term political jitters may
delay a meaningful rally in the pound as we get closer to the 6th May Socttish parliamentary elections.
Last week brought mixed economic data out of the eurozone. The PMIs experienced an unusually large upward
revision and German factory orders were strong, but February employment data came in
weaker-than-expected. We think the former is more meaningful as the latter is a lagging data point.
There are increasing signs that the vaccine rollout in Europe may improve significantly from now on, and we
see room for the euro rally to continue now, especially since the short position overhang on the US dollar
appears to have been cleared out. The one shot Johnson & Johnson vaccine is set to be rolled out in the EU
next week, which may help significantly speed up the so far very sluggish vaccine rollout in the bloc.
Among the second-tier economic indicators released last week in the US, we would focus on the Producer
Price Index for March, a measure of price pressures at the wholesale level. This was a significant surprise,
coming in much higher than the market had expected and confirming our view that price pressures are
building in the US.
Bond yields are taking a breather for now, but a potential upward surprise in the consumer inflation numbers
out this week may provide a catalyst for another test of the top of the range there. Aside from that, we think
that retail sales and industrial production data, both out on Thursday, could shift the US dollar in the second
half of this week.
The Swiss franc was the second-best performing G10 currency last week after the Swedish krona, with the
currency dropping below the 1.10 level against the euro – its strongest position since early-March. The Swiss
currency seems to be supported both by the stabilisation in long-term US yields as well as improving sentiment
towards the European region. It’s also performing better than its Japanese safe-haven counterpart, which could
be explained by the differences in the virus situation in both countries. Japan has recently seen a sharp
increase in new cases and announced tighter restrictions in Tokyo, Kyoto, and Okinawa. The situation in
Switzerland, on the other hand, is much more stable.
We think the Swiss currency could have some more room to appreciate in the short-term, although the
currency’s safe-haven status could limit gains somewhat.
The Australian dollar was stuck in a narrow range versus the USD last week amid an absence of any domestic
major market moving information. The Reserve Bank of Australia kept interest rates unchanged as anticipated
last week, although struck a relatively upbeat tone on the state of the economy. Policymakers noted their
expectations for above-trend growth this year and next, saying that the recovery was already well underway
and had so far been better-than-expected.
The monthly labour report for March will be released this coming Friday. Investors are expecting a slight
slowdown in the pace of job creation, but for the unemployment rate to tick down again by another 0.1 p.p to
5.7%. Aside from that, investors will be paying close attention to the country’s vaccine rollout, which has so far
been a rather disappointing one, with only a little over 4 doses per 100 people so far administered in Australia
since the programme began.
A much better-than-expected labour report for March helped support the Canadian dollar in the back half of
last week, reversing an earlier sell-off in the currency versus the USD. A total of 303k net jobs were created in
the country last month, which marks the largest number of jobs added since September. While this bumper
month of job creation is undoubtedly an encouraging one, the imposition of fresh lockdowns in some regions
suggests that this trend could reverse in April. A number of areas in Canada have experienced a jump in virus
caseloads in the past couple of weeks or so, leading to the reimposition of curfews and closure of businesses in
the likes of Ontario and Quebec. Unlike its neighbouring US, Canada appears to have not yet vaccinated
enough of its population of withstand an increase in cases without tightening restrictions, although a recent
acceleration in the vaccine programme is undoubtedly encouraging.
With little in the way of major macroeconomic data out of Canada this week, we think that CAD will likely be
driven largely by developments elsewhere.
The yuan hovered around the 6.54-6.55 level versus the US dollar throughout all of last week. CNY has held up
relatively well so far to escalating geopolitical tensions between the US and China in recent days. US-Sino
tensions ramped up last week following the news that the US had added an additional seven Chinese
supercomputing entities to its economic blacklist, the latest saga in an ongoing spat between the two nations
that stemmed back to the early days of the Trump administration.
We think that there is a good chance that the yuan could break out of its recent range versus the dollar this
week given the host of economic data releases scheduled for release in China. We will be paying particularly
close attention to tomorrow’s trade data and Friday’s retail sales and industrial production figures for March.
Friday will also see the release of the preliminary Q1 GDP data, which is expected to show annual expansion of
more than 18% in the first three months of last year compared to Q1 2020 and the height of the COVID-19
lockdowns in China. Given that this is a lagging indicator it may, however, be partly overlooked by investors.