Monex Europe Limited

04/12/2021 | News release | Distributed by Public on 04/12/2021 02:42

US Treasury auctions in scope for broad dollar ahead of March CPI release tomorrow


Sterling is trading slightly higher against the dollar this morning while gains are larger against the euro. There is a buzz around the UK this morning and the positive sentiment is filtering into GBP as parts of the service sector reopen this morning. After nearly 100 days, non-essential shops and services will re-open subject to capacity limitations, while the hospitality sector reopens to outdoor guests. The emphasis going forward will now be on how aggressive the consumption rebound in the UK is after households stockpiled liquid deposits over the past year. This is a highly contentious topic in the Bank of England with key policymakers sitting on either side of the debate. Some, including Gertjan Vlieghe suggest that the distribution of this saving is towards those with a lower marginal propensity to consume, while households likely view the rise in savings as new wealth, which will also reduce the extent to which it is spent in the economy. Meanwhile, on the other end of the spectrum, Chief Economist Andy Haldane argues that the level of pent up demand in the system is elevated and will drive a strong recovery in the UK economy. Only time will tell how consumption recovers after the pandemic, but with the consumer now less constrained by government measures, timely data points will be key in determining how strong the rebound is. Although alternative data like the BoE CHAPS data will be noisy at first, an underlying trend is likely to appear and will determine how strong the initial rebound in UK assets is. In Brexit, the UK and EU are making progress in talks on how to apply post-Brexit trade rules in Northern Ireland, which have in part caused the latest set of protests in Belfast. Today, the data calendar is empty for GBP with just BoE member Silvana Tenreyro speaking on economic shocks and trade at 14:00 BST.


The euro held up well against the US dollar last week and was among the better performers as hopes for a faster vaccine roll-out in Q2 prompted investors to give the euro the benefit of the doubt despite the backlog in vaccinations so far. This week, the pair will be at the mercy of developments in US Treasury yields given today's Treasury auction and tomorrow's US CPI data releases. Over the weekend, ECB member Fabio Panetta commented on the eurozone growth prospects and stated the euro area will not return to its pre-crisis growth path unlike the US, and added that two years of economic expansion may have been permanently lost. While this is dependent on how consumption patterns in the recovery phase will materialise and if there will be a large wealth and pent up demand effect, Panetta's comments correctly point to the elevated upside risks to US inflation compared to eurozone inflation given the amp fiscal and monetary responses from the US while much of the roll-out of the EU recovery fund still is uncertain. For today, markets will focus on eurozone retail sales at 10:00 BST, which have so far held up strongly throughout this quarter as the lockdown measures have had a less stringent effect on the manufacturing sector compared to the first wave. Beyond that, markets will focus on the ECB's Hernandez de Cos who speaks at 15:00 BST.


The US dollar managed to resist further depreciation across the board this morning after the dollar index fell by 0.90% over the course of the last week. The dollar's losses were capped as higher-than-expected producer prices on Friday increased inflation expectations ahead of Tuesday's consumer price index figures, which stemmed the slide in Treasury yields. Federal Reserve Chair Jerome Powell stated in an interview on Sunday that the US economy is at an inflection point with stronger growth and hiring ahead thanks to the rising vaccinations and powerful policy support, although the virus remains a threat. For today, US Treasuries will be watched ahead of auctions in 3Y and 10Y notes later this afternoon while the economic data calendar is sparse for today. The bid-to-cover ratio will be an important factor as Treasury demand will help shape the outlook on US debt prior to the CPI release, which could show a substantial rise in inflation tomorrow due to base effects. With the Federal Reserve warning against the temporary inflation overshoot that's about to become visible, how primary dealers position themselves ahead of the release will be telling for bond investors and markets generally. US yields still remain a dominant driver of FX price action and the broad US dollar and with little on the calendar in the G10 today, how the bond market performs will be of heightened importance. Retail sales and industrial production on Thursday will also be on the markets' watch, especially after January's figures received a boost from the $600 fiscal stimulus checks which were part of the previous fiscal bill. As the $1400 stimulus checks have been distributed as part of the 1.9trn fiscal package in March, the initial signs could filter into the retail sales data which is expected to climb by 5.5% after falling by 3% in February while industrial production is set to grow by 2.5%, according to Bloomberg's median of forecasts.


The Canadian dollar defied the broad rebound in the US dollar on Friday after jobs data showed a greater than expected improvement in the labour market. The Canadian economy added 303,100 jobs in March, an increase from the 259,200 in February and much greater than the 100,000 median expectation supplied to Bloomberg. The elevated jump in job gains was a by-product of services reopening in major provinces last month, with Ontario posting the largest net job increases. While most of the positive sentiment was offset by the fact that tighter lockdown measures have been reimposed since, reversing much of the job gains, the bumper number has soothed fears that the labour market is subject to much deeper scarring due to the pandemic. The March labour force survey highlighted how elastic the labour market recovery is to economic reopening at the current stage, with 95,000 jobs added in the retail sector alone. The loonie is struggling to hold onto gains this week, however, as the dollar trades mixed across the board. The loonie continues to trade at an elevated level with near-term economic headwinds plentiful, a reason why risks are tilted to a weaker currency in the short term. Today, the BoC Business Outlook Survey is due at 15:00 BST, but the data from it is likely outdated as lockdown conditions have changed since the survey was conducted. However, positive readings from the survey could help the loonie recover losses in a similar vein to last week's jobs data, as it highlights how robust the recovery can be once restrictions are eased again. Meanwhile, the loonie will focus on the broad US dollar as key treasury auctions are on the calendar.


This morning has seen a relatively quiet session in the APAC region, with developments in China drawing the main focus as the PBoC injects cash into the banking system via open market operations for the first time since late February. While this tends to suggest an easing of financial conditions and therefore bodes well for China's growth, the decision to sell 10bn yuan in reverse repo was seen as a technical factor. With tax payments due, the banking system tends to have reduced liquidity around mid-April, suggesting the PBoC is merely aiming to offset an undue tightening in interbank lending conditions as opposed to directly trying to loosen policy. This has resulted in a relatively benign session for the yuan, which closed practically flat against its fixing when onshore markets closed this morning. The developments come as traders eye Friday's Q1 GDP data, which should give a strong indication on how robust Chinese growth will be as the recovery matures. In turn, this will give an indication of what policy will look like for the coming year.


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