The Fed was dovish yesterday the USD has a minor sell off and bond yields remained above the 1.600 level – Our view is the USD is likely to rally from current levels.
“The Federal Reserve on Wednesday declined to let up on its easy-money policy despite an economy that it acknowledged is accelerating. As expected, the U.S. central bank decided to keep short-term interest rates anchored near zero as it buys at least $120 billion of bonds each month. The latter part of policy is a two-pronged effort to support an economy that grew strongly to start 2021 as well as to support market functioning at a time when 30-year mortgages still go for around 3%.” (CNBC)
The above was exactly as expected – Fed chair Jerome Powell noted the recovery is “uneven and far from complete.” While he noted that inflation pressures could rise in the coming months, these “one-time increases in prices are likely to only have transitory effects on inflation.” Powell added that it’s still not time to talk about reducing policy accommodation, including the asset purchases. So a dovish Fed and the USD sold off but volatility was low. In terms of a USD rally traders should focus on the Bond market.
Bond Traders are not seeing inflation as transitory – we have the yield above 1.600 on the chart below and we expect it to move higher. On the second chart which shows the Copper Gold Ratio v the 10 Year Note we have a wide gap and we expect it to get closed:
The Dollar Index
The DXY is holding above the 91.50 level and if it can push up through 92.00 we would expect follow through buying to the upside.
The view below was written before the meeting: “We may get an idea of the prerequisites for the Fed launching a debate on the balance sheet. We also debate how a tapering process may look like once started. The tapering bang will most probably come in June and the actual decision on the BS in September. Recall Bullard’s latest “hint” on the BS and the 75/80% vaccination of the population.
Nordea also reminds us on the inflation running hot “narrative”, and the inv bank expects inflation to surge and they expect the summer readings to be “hot” when it comes to inflation. Fed is basically behind the curve here. On the actual tapering (when it comes), Nordea expects;”The Fed is likely to pursue a Bank of Canada-style tapering with outcome-based scenarios for the wind down of the balance sheet increases. If inflation prints at Y and unemployment prints at X, then we will lower the minimum purchase pace to Z.” (Nordea) We got a dovish Fed but the bearish news is now in for the USD and Nordea’s view we think is what the Fed have in mind but the bond market is a danger to this view…
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