We have the Fed today and the USD has sold off into it but the Fed are unlikely to be more dovish than the market expects and we think a USD rally is likely. US Bond Yields should be watched closely for confirmation and if they move higher the USD should follow and a potential trade setup we like from a risk reward point of view is USD/CAD.
The Fed and Inflationary Pressure
“The Fed is willing to look past transient inflation impact and not react pre-emptively (AIT) and will supply clear communication well in advance of any bond-buying taper. We expect no policy changes in this meeting and the Fed’s taper discussion will likely only start in late 2021/early 2022. Policy rate will stay at 0-0.25% till 2023.” (UOB)
The problem is inflation is surging and the market wants to believe that the Fed will keep rates low until 2023 but can it? “They’re running out of time,” said Mark Zandi, chief economist at Moody’s Analytics, adding the Fed needs to slow its asset purchases. “The economy is busting out all over.” (CNBC)
The Fed cannot allow inflation to run out of control and we don’t think the market will continue to believe that they will. Yesterday we had data that again points to higher inflation:
The US consumer is 70% + of GDP and we had a decent number this week in terms of consumer confidence: “U.S. consumer confidence moved up more than 12 points to 121.7, handily exceeding consensus expectations. The level for this bellwether for consumer spending stood at 132.6 in February 2020, just before COVID was designated as a pandemic the following month.” They continue:
March economic indicators largely exceeded expectations; admittedly with some exceptions in the manufacturing sector where comparatively modest gains were a function of supply chain hiccups. The key question is the extent to which the robust consumer recovery will continue as stimulus checks no longer pad disposable income for households. On that score, this better-than-expected gain is encouraging.” (Wells Fargo)
“The S&P Core Logic Case-Shiller house price index this week jumped 12% in February from a year ago, the fastest in 15 years, after rising 11.2% in January. Accelerating house price inflation was corroborated by a third report showing the Federal Housing Finance Agency house price index shot up a record 12.2% on a year-on-year basis in February after increasing 12.1% in January.” (Reuters) L
umber has done far better than Bitcoin in the last three months and of course, is used in housing – inflation is moving up as commodities surge with copper at multi year highs and many other commodites strong. Commodities are a leading indicator for inflation and we expect the market to ignore the Fed view that inflationary pressure will ease and push bond yields up if they move higher the USD will follow.
US 10 Year Note & 10 Year V Copper Gold Ratio
Two charts below the first – The 10 Year Note which we can see has firmed above the key 1.500 support level and we are now back above 1.600 and we are looking for follow through to chart highs and longer term to 2.00. If we break below 1.500 this would negate our USD bullish stance The second chart shows the Copper Gold Ratio v the 10 Year and we can see the gap has widened, we are now looking for the 10 Year Note to close the gap.
USD/CAD Analysis
In terms of USD/CAD we had a hawkish Bank Of Canada last week – they upgraded their outlook for the economy, cut stimulus, and hinted at rate rises in 2022 but the good news is in for the CAD in our view. We are at a key support level and if we can push off it we would expect a short-covering rally in the USD.
In terms of the technicals, we have low volatility in the last couple of days as the pair trades in low volatility after a sharp sell-off in response to the Bank of Canada – we are above the March low and would go long on a move above resistance with a stop clear of the tail. If we were to break the March Low we would look for Monthly support at 1.2300 to hold and buy off the level on strength.
Research provided by LearnCurrencyTradingOnline.com
The given data provided contains additional information, forecasts, analysis and market reviews published on the Key to Markets website.
Before making any investment decisions, you should know that:
– Key to Markets publishes analysis of any kind solely for information purposes and such analysis should not be construed as investment advice or a solicitation to buy or sell any financial instruments including without limitation CFDs.
– Key to Markets will not be liable for any loss or damage, which may arise, directly or indirectly from use of or reliance on the data provided by Key to Markets.
– Whilst all reasonable efforts are made to ensure that all content sources are reliable and that all information is presented, as far as possible, in a comprehensible, timely, accurate and complete manner, Key to Markets does not guarantee the accuracy or completeness of any information contained in the analysis.
– Past performance is not a guarantee of future results.