More conical clues at Jackson Hole
Fundamental US Dollar Forecast: Neutral
- The US dollar (via the DXY index) hit new annual highs as traders began to anticipate a faster-than-expected timeframe for the Federal Reserve’s stimulus withdrawal.
- Fed Chairman Jerome Powell’s speech in Jackson Hole is loosely titled “The Economic Outlook” and is scheduled to take place on Friday, August 27 at 10 EDT / 14 GMT.
- According to the IG Customer Sentiment Index, the US dollar has a mixed bias in the last week of August.
The US dollar hits new highs
The US dollar (via the DXY index) added +1.01% last week, moving youp to new annual highs as traders began to anticipate a faster-than-expected timeframe for the withdrawal of the Federal Reserve stimulus. The largest component of the DXY index, EUR / USD rates, fell -0.81% and closed below 1.1700 for the first time since October 2020. USD / JPY rates gained +0 , 16%, hampered by the weakness of the equity markets.
But the gains for the US dollar were flush in all other cases, as escalating concerns over the delta variant undermined confidence in growth-sensitive global currencies: GBP / USD fell -1.76%; AUD / USD fell -3.13%; NZD / USD fell -2.94%; and USD / CAD added + 2.47%.
The US economic calendar does not wait for Jackson Hole
The end of August will produce a loaded US-based event risk case. During the week of the Jackson Hole Economic Policy Symposium, there are five events rated “high” that promise to result in significant volatility based on event risk.
- At On Monday, 23 august, the JulyThe Chicago Fed’s National Activity Index, August US Markit Manufacturing PMI (flash) and July US existing home sales data are expected.
- On Tuesday, August 24, the July US New Home Sales Report will be released.
- On Wednesday, August 25, the July US Durable Goods Orders report is expected to be released.
- On Thursday, August 26, the Jackson Hole Economic Policy Symposium kicks off. The second release of the 2Q’21 US GDP report is expected, as are weekly jobless claims.
- On Friday, August 27, the July US PCE report (the Fed’s preferred inflation indicator) will be released, as will the US Michigan consumer sentiment reading in August. At 10 EDT / 14 GMT, Fed Chairman Powell will deliver his speech in Jackson Hole, loosely titled “The Economic Outlook.”
Atlanta Fed GDP growth estimate for Q3’21 (August 18, 2021) (graph 1)
Based on the data received so far on 3Q’21, Atlanta Fed GDPNow the growth forecast has been revised downwards from + 6.2% to + 6.1% on an annualized basis. After last week’s data, “the immediate forecast for real growth in residential investment in the third quarter fell from 3.4% to 3.0%.“
The next update to the Atlanta Fed’s GDPNow growth forecast for 3Q’21 is expected on Wednesday, August 25.
For full American economy forecast data, display DailyFX Economic Calendar.
All eyes (and ears) on Fed Chair Powell
If only to highlight how far concerns about the delta variants have gone in recent weeks, the Jackson Hole Economic Policy Symposium has gone from an in-person event to a virtual one next week. The event, titled “Macroeconomic policy in an unequal economy”, is likely to fuel financial market volatility at the end of the week and early next week.
Fed Chairman Jerome Powell’s speech in Jackson Hole is loosely titled “The Economic Outlook” and is scheduled to take place on Friday, August 27 at 10 EDT / 14 GMT. The mysterious headline will only prompt Fed watchers to look for further clues to the approach of a Fed tapering, as the reaction to the July FOMC minutes has been found to be consistent with the historical precedent established around the 2013/2014 taper calendar.
The bond market expects a Hawkish Powell
We can measure whether a fed the rate hike is integrated into the price using eurodollar contracts by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Chart 1 below shows the difference in borrowing costs – the spread – for the September contracts of 2021 and December 2023, in order to assess the evolution of interest rates in the interim period between September 2021 and December 2023.
Spread of Eurodollar futures (September 2021-December 2023) against the American butterfly 2s5s10s: daily rate chart (August 2020 to August 2021) (graph 2)
We can overlay the Fed’s rate hike ratings with the US Treasury’s 2s5s10s butterfly to determine whether or not the bond market is acting in a manner similar to what happened in 2013/2014 when the Fed started. to move forward with its reduction plans. The butterfly 2s5s10s measures non-parallel changes in the US yield curve, and if the story is correct, that means intermediate rates are expected to rise faster than short or long rates.
Indeed, while the Fed’s rate hike ratings were largely unchanged after the July FOMC minutes – which clearly indicated the line between the rate cut and rate hikes – we can see that the U.S. yield curve is moving in a way that suggests a more hawkish Fed is here. While there are 87 basis points of discounted rate hikes through the end of 2023, the 2s5s10s butterfly hit its highest rate since the Fed’s tapering talks began in June.
US Treasury yield curve (1 to 30 years) (August 2019 to August 2021) (Chart 3)
Historically speaking, the combined impact of rising US Treasury yields – particularly as middle rates outperform short and long rates – along with the Fed’s high rate hike ratings produced a more favorable business environment for the US dollar .
Positioning of CFTC COT US dollar futures contracts (August 2020 to August 2021) (Chart 4)
Finally, in terms of positioning, according to the CFTC’s TOC for the week ended August 3 speculators increased their net long positions in the US dollar to 19,206 ccontracts from 18,880 contracts. The net long positioning of the US dollar remains near its highest level since the second week of March 2020 (the peak of concerns related to the coronavirus pandemic in financial markets).
— Written by Christopher Vecchio, CFA, Senior Currency Strategist