Can the US economy lead the dollar higher?

Rising US Treasury rates, strong Retail Sales in January, and a demand-pumping stimulus package from Congress point to a resurgent economy. But the dollar languishes not far from the bottom of its three-year range against the euro and loonie.  What will it take to get the greenback moving? Join senior analysts Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a look at the immediate currency prospects.

Yohay Elam: The positive take on higher yields is that they represent stronger growth prospects. Markets seem to have learned to live with returns around 1.4%, at least on Wednesday. But can they continue tolerating further gains?

Joseph Trevisani: I think so. 1.5% is a historical pittance. This is a 5-year chart of the 10-year Treasury yield.

Valeria Bednarik: I think so, mainly after Powell's latest testimony before Congress. Inflation is just one leg, employment is the other, and according to Powell, there's a long way ahead until the sector recovers pre-pandemic levels.

Yohay Elam: Powell foresees inflation reaching 2% only in three years. Markets are on Powell's page.

Joseph Trevisani: Once and future inflation..the Fed has been predicting that for a decade and more.

Yohay Elam: They have thrown the towel before the pandemic, waiting to see inflation happen and not try to be ahead of the curve. And last summer they made it official policy.

Joseph Trevisani: Price stability is in the Fed's mandate...mentioning it is a bureaucratic imperative...

Valeria Bednarik: Yeah, and added that is not about forecasts now, but actual inflationary pressure what could motivate some action.

Yohay Elam: We'll believe it when we see it. "Show me the money."

Joseph Trevisani: Since the financial crisis consumer demand has not pushed inflation..it is possible that the surge in demand expected might do so. I think Powell alluded to that in his testimony. Exactly... and the Fed has prepared for that with its inflation averaging policy.

Valeria Bednarik: Yet a bounce in consumption is neither at sight.

Joseph Trevisani: Well durables were much stronger than expected and so were retail sales.

Yohay Elam: Despite a process of deglobalization, inflation remains global.

Joseph Trevisani: I think we may be a mini roaring 20s. Inflation is now a global phenomenon.

Valeria Bednarik: Those strong numbers are yet to prove to be sustainable and not just the result of December checks.

Yohay Elam: The Fed's other mandate is also critical.

Joseph Trevisani: Agreed, but it points to the psychological factor... I know that I  would like a few restaurant meals.

Yohay Elam: To have sustained consumption, you need jobs. Powell and co have thrown the unemployment rate out.

Valeria Bednarik: Yeah is a snowball.

Joseph Trevisani: I think the January sales figures were the result of the stimulus checks..but more is coming.

Yohay Elam: Never underestimate the American consumer. Buy buy buy.

Joseph Trevisani: But for hiring employers need to think there will be sustained consumption..its the Keynesian definition Yes my fellow countrymen like their goods.

Yohay Elam: The Fed sees 10 million people that lost jobs in the pandemic and seemingly will not tighten until they are all back and received several paychecks.

Joseph Trevisani: Luckily most of those remaining unemployed are in services where hiring can quickly ramp up. Restaurants will come back fast, travel will be slower, but domestic travel may be close to normal by the fall in the US. There is bound to be a surge in demand. Certainly, equities and the credit markets think so. The dollar is an interesting case, lower against the euro sterling and Canada but higher versus the yen.

Valeria Bednarik: The services sector no doubt is the most beaten. It will take long till it comes back. It's the big drag to an economic comeback.

Joseph Trevisani: Canadian dollar strength can be explained by commodities...is the non-event Brexit enough to explain the euro and sterling?

Yohay Elam: Vaccines explain EUR/GBP.

Valeria Bednarik: Sterling is being helped by the immunization campaign in the UK. Right.

Joseph Trevisani: I meant euro and sterling...

Valeria Bednarik: It does not matter if the numbers are still high in the kingdom. It's hoped that boosts pound and the EUR, is far from performing decently. is barely 50 pips above its previous range which persisted for over a month. Doesn't seem to have much strength on its own.

Yohay Elam: EUR/USD is most frustrating, with occasional bursts of medium volatility...

Valeria Bednarik: Yups.

Joseph Trevisani: Initial claims fell more than 100,000 this week, retail sales and a durable good point to consumer demand... Treasury rates are surging, but the dollar is weaker, not much but still, it is down.

Yohay Elam: Dollar and yields, the correlation is not that great recently.

Valeria Bednarik: Yeah. Speculative interest needs to prove sustainable growth in the US I guess.

Joseph Trevisani: Yes, Perhaps next week's NFP, forecast at 110,000 might convince if it is better.

Valeria Bednarik: At 100K per month, it will take almost a decade to recover the 10 million positions missing. 100K is a bad bad number.

Yohay Elam: With so much support it will eventually pick up. The vaccination campaign is already having an effect in the US, very encouraging.

Valeria Bednarik: Yeah, but if we are looking for a dollar-supportive number, 100K won't be it.. 500K would do a better job.

Joseph Trevisani: Agreed  100,000 is nowhere.

Yohay Elam: 100K makes sense for now given jobless claims. I think it will shoot higher in the spring and summer. Circling back to inflation. Commodity prices are rising. It will likely push headline inflation higher. Will it spill into core inflation and force the Fed´s hand?

Joseph Trevisani: No, I do not see the Fed reverting to an inflation watchdog.

Valeria Bednarik: Umm a far away scenario, if you ask me. Commodities are rising, yes, but gold is roughly $300 below its August peak. And oil is still trimming its pandemic-related collapse.

Joseph Trevisani: Given the long-term movement of inflation rates globally. Is gold still a primary inflation hedge?

Yohay Elam: Gold has no yield, Treasuries do.

Joseph Trevisani: Well sort of. I mentioned that yesterday in an interview with Axios. That rising Treasury yields could be a real threat to equity prices if they begin to offer an alternative return.

Valeria Bednarik: Yeah, but Treasuries are a conservative choice. No adrenaline there... Not sure how much could them affect stocks. Investments that aim to totally different profiles.

Yohay Elam: So far, even Esther George sees the rise in yields as a sign of optimism and strength, nothing to worry about. And we're close to 1.50%. It seems that every rise in yields or commodities triggers a pullback in stocks – but that only serves as a buying opportunity. Eventually, markets get used to higher prices.

Joseph Trevisani: I don't think there is any other credible interpretation. The Fed was the most insistent CB in pushing rates higher after the financial crisis. Six years later it is true, but they did...

Yohay Elam: They have changed course and I think it will pay off. Stock markets will continue rising.

Joseph Trevisani: So I don't think the Fed will be worried about higher rates at this point...

Yohay Elam: And inflation will not come – supply will eventually appear to meet demand.

Joseph Trevisani: Mortgage rates have not really responded yet...

Yohay Elam: US housing is on fire.

Joseph Trevisani: Canada too. Macklem warned about it on Tuesday. Here is the reason.

Joseph Trevisani: And yes, you read that correctly. 2.81% on a 30-year mortgage. Why not buy two?

Yohay Elam: My bank offers everybody 1.30% for 20 years fixed.

Joseph Trevisani: Building Permits at highs not seen since the housing bubble. Ha, well we have our home, so I am going to miss this market. Yohay, this is for you.

Valeria Bednarik: Indeed great opportunity, But once again, a 10% real unemployment rate.

Yohay Elam: K-shaped recovery. Office workers saved money and are looking for new homes. Many others lost their jobs.

Joseph Trevisani: That rate is very unevenly distributed, as Powell and others have pointed out. It is in lower-wage service employment where the rate is probably double that. So I wonder if the economy will reconstitute those jobs as demand picks up or if any of the changes are permanent.

Valeria Bednarik: There will change, that's for sure,  But people have to do something.

Joseph Trevisani: For instance, the restaurant business in Manhattan has been devastated. Many places are gone, so, how can employment recover fully? It would seem it cant.

Yohay Elam: Vaccines.

Valeria Bednarik: It will take longer, but eventually it will return. Exactly, with the end of the pandemic, whenever that happens it's like a post-war reconstruction.

Joseph Trevisani: At the moment all signs point to a rapid recovery. Hopefully of employments also, but so far the actual data is very very preliminary.

Yohay Elam: Where next for the dollar?

Valeria Bednarik: Still down, for a while.

Joseph Trevisani: I think it will have to be higher, once we get better, and I guess I should say, if, to stay on the right side of the gods, statistics, until then a minor drift lower.

Yohay Elam: Yeah, I also think it will fall, mostly because of the Fed.