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Andreas Zanin
Analysis | June 1, 2021

Outlook and forecast: USD, Inflation and NFP

In terms of the USD its direction its all about inflation and bond yields while we have NFP this week we see it having minimal impact on the USD. The market is generally bearish of the USD on the view the Fed will keep interest rates low and provide ample stimulus going forward but they won’t in our view…

First, let’s take a look at NFP which many are seeing this week as the key news realize of the week here are the views of MUFG: “The USD was little changed in the initial aftermath of last month’s weaker than expected NFP report although it has since then weakened over the past month. The NFP report is becoming more important in determining USD performance. It will likely take much stronger job growth of closer to 1 million/month to significantly bring forward Fed rate hike expectations and strengthen the USD. In contrast, the recent pace of job growth so far this year of 465k or lower will be seen as consistent still with a gradual pace of tightening and leave the USD vulnerable to further weakness in the near-term.”

Its not that important at all – the weak NFP was caused by workers NOT job hunting due to Government support which is actually USD bullish as it’s creating wage inflation as wages soar higher which can be seen in the chart later in this article.

The Fed is already reducing stimulus and will taper bond-buying soon. The Fed is already draining money from the market with Reverse Repo operations. Offsetting its $100B monthly purchases, the Fed just sold $500B in the last 2 weeks. Reverse Repo operations were the prelude to the 2018 tightening. The Fed knows they will have to taper and reduce stimulus and they will raise rates far quicker than the market expects. Below charts on why the Fed needs to act and then charts of the bond market and DXY.

Inflationary Pressure and the Fed’s Need to Act

On the chart below we can see infation soaring higher and if the Fed fail to act it will continue to run to the upside.

The chart below show that we could see a huge rise in inflation coming up: “There is a clear risk that the May inflation report will prove to be an absolute shocker (published 10th of June) with e.g. used cars and trucks up by 50% year over year, and a potential further increase in the yearly increase in the rent of shelter component. Don’t rule out >4% core CPI inflation, which will increase the tapering pressure on the Fed even more.” ( Nordea)

The Feds Favorite Measure of Inflation is the PCE. The chart below shows consumer spending against the PCE. As we can see consumer spending has soared recently and the PCE looks set to play catch up.

The chart below from Macrobond shows inflation expectations going forward if the Fed dont act

In terms of jon vaccancies there at a record but many US wokers are not coming back into the workforce due to Government action to keep them at home – Higher wages are being paid and this cost will be passed on to the consumer.

Two charts below from Nordea which clearly show the Feds stimulus has got out of control. First shows the Fed is now bigger in the US Treasury markets than foreign buyers. Second chart shows Fed’s holdings of MBS vs house prices.:

“The tapering process could be launched before the employment ratios are back to pre-Covid levels, not least as the May inflation report (due 10th of June) looks like another shocker with core inflation above 4%…Why not start a tapering process of the MBS component of the QE program ASAP? This would also be the best fit for the woke agenda of the Fed since buying mortgages during a bizarre rally in house prices certainly creates inequality on all levels!”  (NORDEA)

Watch 10 Year Note And DXY

The Fed are getting ready to act as we noted in their Reverse Repo operations, tapering bonds will follow shortly and interest rate hikes will be coming far quicker than the market expects. Charts below of US 10 Year Note and the DXY:

In terms of the 10 Year Note we are trading in asideways range at present =- A move up to 1.700 is expected to help firm the USD and a move up to 2.00 in the coming months is expected. On the DXY chart we are near recent lows and to confirm a near term bottom we need to break above resistance 90.50 which is clear of the 20 day Moving average and last weeks high if we breakout to the upside a rally up to 91.50 then 92.50 is expected.

 

Research provided by LearnCurrencyTradingOnline.com

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