US dollar key forecast: neutral
- The US dollar (Via the DXY index) has risen to an annual high as traders have begun to wait for a faster-than-expected timetable for the Federal Reserve’s waiver of stimulus.
- Fed chairman Jerome Powell’s speech in Jackson Hole is vaguely titled “Economic Outlook” and is scheduled for Friday, August 27 at 10 a.m. EDT / 14 GMT.
- According to ttheme IG customer mood index, The US dollar has a mixed bias heading to the last week of August.
The US dollar sets new highs
US Dollar (via DXY Index) an increase of + 1.01% last week, moving approxp with recent annual records as traders have begun to expect a faster-than-expected timetable for abandoning the Federal Reserve’s stimulus. The largest component of the DXY index, EUR / USD interest rates fell to -0.81% and closed below 1.1700 for the first time since October 2020. USD / JPY interest rates increased by + 0.16%, which was hampered by weakness in stock markets.
However, US dollar gains were broadly the same as the increase in delta variation raised concerns about confidence in global growth-sensitive currencies: GBP / USD decreased -1.76%; AUD / USD decreased -3.13%; NZD / USD decreased -2.94%; and USD / CAD added + 2.47%.
The US economic calendar is not waiting for Jackson Hole
The end of August brings a high risk of events out of the United States. During the week of the Jackson Hole Economic Policy Symposium, there are five highly valued events that promise to lead to significant risk-based volatility of events.
- On top Monday, August 23, JulyThe maturity is the Chicago Fed National Activity Index, the August U.S. Markit Production PMI (lightning), and the July U.S. available home sales data.
- A sales report for a new US home will be released in July on Tuesday, August 24th.
- A report on US durable goods orders will be released on Wednesday, August 25th.
- The Jackson Hole Economic Policy Symposium begins on Thursday, August 26th. The second publication of the 2Q’21 US GDP report, as well as weekly unemployment claims, is expected.
- On Friday, August 27, the US July PCE report (Fed’s preferred measure of inflation) will be published, as will the August US Michigan consumer sentiment. At 10 EDT / 14 GMT, Fed Chairman Powell will give his Jackson Hole speech entitled “Economic Outlook.”
Atlanta Fed GDPNow 3Q’21 Growth Forecast (August 18, 2021) (Figure 1)
Based on data received so far 3Q’21, Atlanta Fed GDPNow the economic growth forecast has been lowered from + 6.2% to + 6.1% per year. After last week’s data “Real housing investment growth forecast for the third quarter fell from 3.4 per cent to 3.0 per cent.“
The next update of the 3Q’21 Atlanta Fed GDPNow growth forecast is scheduled for Wednesday, August 25th.
Absolutely The US economy data forecasts, see DailyFX economic calendar.
All eyes (and ears) on Fed Chair Powell
Just to highlight how far the delta issues have come in recent weeks, the Jackson Hole Economic Policy Symposium has shifted to a virtual event in person next week. Event titled “Macroeconomic policies in an uneven economy” is likely to be disrupted by financial market volatility at the end of the week and early next.
Fed chairman Jerome Powell’s speech in Jackson Hole is vaguely titled “Economic Outlook” and is scheduled for Friday, August 27 at 10 a.m. EDT / 14 GMT. The mysterious headline encourages Fedi followers only to look for more clues as to what the Fedi restriction is approaching as far as the reaction to July FOMC minutes has proved to be in line with the creation of a historical precedent around the 2013/2014 downgrade timeline.
The bond market is waiting for Hawkish Powell
We can measure whether a Feeded the interest rate is estimated using Eurodollar contracts, examining the difference between the borrowing costs of commercial banks over a certain period of time in the future. Figure 1 below shows the difference in borrowing costs – the margin In September Agreements for the year and December 2023 to assess where interest rates are moving in the interim period In September 2021 and December 2023.
Spread of Eurodollar futures (September 2021-December 2023) versus US 2s5s10s Butterfly: daily rate chart (August 2020 to August 2021) (Figure 2)
We can cover the Fed’s interest rate hikes with the US Treasury’s 2s5s10s butterfly to assess whether the bond market is performing similarly to what happened in 2013/2014, when the Fed gradually began to move forward. The 2s5s10s butterfly measures non-parallel shifts in the US yield curve, and if the history is accurate, this means that intermediate interest rates should rise faster than short-term or long-term interest rates.
Indeed, although the Fed’s rate hike coefficients remained largely unchanged after the FOMC’s July protocol – a clear indication of the downside between the cut and the rate hike – we see the US yield curve moving in a way that suggests a trickier Fed here. Although interest rate cuts will be 87 basis points per second until the end of 2023, the butterfly rose to its highest level in 2s5s10s after Fedi lowered the debate in June.
U.S. Treasury Yield Curve (1 Year to 30 Years) (August 2019 to August 2021) (Figure 3)
Historically speaking, The combined effect of rising US Treasury interest rates — especially when average interest rates exceed short-term and long-term interest rates — combined with a higher Fed rate hike has created a more favorable trading environment for the US dollar.
CFTC COT US dollar futures positioning (August 2020 to August 2021) (Figure 4)
Finally, looking at the positioning, according to the CFTC’s week-end COT August 3 speculators increased their net long US dollar positions to 19,206 contracts from 18,880 contracts. The net long positioning of the US dollar will remain close to its highest level since the second week of March 2020 (the peak of the coronavir pandemic problems in the financial markets).
– Written by Christopher Vecchio, CFA, Senior Currency Strategist