Fundamental Forecast US Dollar: Neutral

  • Despite a disappointing overall figure, the September US NFP report was another important step on the path to reducing asset purchases by the Fed.
  • Hawkish expectations for the Federal Reserve by bThe interest rate and rate markets are now the most aggressive they were all year.
  • According to the IG Customer Sentiment Index, the US dollar has a mixed bias on the way around mid-October.

Mixed data on the US dollar

The first full week of October produced modest gains for the US dollar (via the DXY index) after good data released earlier in the week was undermined by a disappointing September US NFP report on Friday. The DXY index only gained + 0.04%, led by a stronger USD / JPY which gained +1.03%. A weaker EUR / USD, which fell -0.19%, was offset by a stronger GBP / USD, which added + 0.50%. Nonetheless, bond and rate markets are now discounting their most aggressive hawkish expectations of the Federal Reserve since the onset of the coronavirus pandemic.

The US economic calendar looks at the second half of the week

Mid-October will produce another loaded US-based event risk case. After the September US NFP report, several speakers from the Federal Reserve will be the focus of attention, along with three “high” events that typically produce significant volatility in currency markets. All important economic data is expected in the second half of the week.

  • Wednesday October 13,weekly US MBA mortgage applications and september we inflation report (CPI) will be released in the morning, while the month of September FOMC Meet minutes and a speech by Fed Governor Lael Brainard in the afternoon.
  • On Thursday, October 14, Fed Governor Michelle Bowman will deliver a speech in the morning ahead of the release of weekly US jobless claims, US Product Price Index (PPI) figures September and a speech by Atlanta Fed Chairman Raphael Bostic. In the afternoon, Richmond Fed Chairman Tom Barkin will deliver remarks and the September U.S. budget statement will be released.
  • On Friday, October 15, the September U.S. Retail Sales Report, the October Michigan Preliminary Survey of Consumer Confidence, and the August U.S. Business Inventory Report will be released. In the afternoon, New York Fed Chairman John Williams will deliver a speech.

Atlanta Fed GDP growth estimate for Q3’21 (October 8, 2021) (graph 1)

Weekly Fundamental Forecast US Dollar: November Drop On Track After NFP

Based on the data received so far on 3Q’21, Atlanta Fed GDPNow the growth forecast is now at its lowest expectation for the quarter at + 1.3% on an annualized basis. This was due to “an increase in the now forecast of real gross private domestic investment growth in the third quarter +10.5% To +10.7% was offset by a decrease in the nowcast for real personal consumption expenditure growth in the third quarter compared to +1.1% To +1.0%.

The Atlanta Fed’s next 3Q’21 GDPNow growth forecast update is expected on Friday, October 15.

For full American economy forecast data, display DailyFX Economic Calendar.

Hawkish Fed still expected after September US NFP

We can measure whether a Fed rate hike is built into the price using Eurodollars by looking at the difference in borrowing costs for commercial banks over a specific time horizon in the future. Graphic 2 below shows the difference in borrowing costs – the spread – for the October 2021 and December 2023 contracts, in order to measure the evolution of interest rates by December 2023.

Spread of Eurodollar futures (October 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], index DXY [RED]: Daily graph (April 2021 to October 2021) (graph 2)

Weekly Fundamental Forecast US Dollar: November Drop On Track After NFP

By comparing the Fed rate hike ratings with the US Treasury’s 2s5s10s butterfly, we can assess whether or not the bond market is acting consistently with what happened in 2013/2014 when the Fed signaled its intention. reduce its quantitative easing program. The 2s5s10s butterfly 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.

As has been the case for several weeks now, the persistently high Eurodollar spreads alongside the action on US yields are consistent with the 2013/2014 period, suggesting that a more hawkish Fed is on the way. point to arrive.

There is 111-bp of discounted rate hikes through late 2023 as the 2s5s10s butterfly recently hit its widest spread since the Fed’s tapering talks started in June (and its widest spread in any year 2021). What’s more, in line with recent chatter from FOMC officials, the first rate hike seems increasingly likely at the end of 2022.

US Treasury yield curve (1 to 30 years) (October 2019 to October 2021) (Chart 3)

Weekly Fundamental Forecast US Dollar: November Drop On Track After NFP

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 created a more favorable business environment for the US dollar .

CFTC COT positioning on US dollar futures contracts (October 2020 to October 2021) (Chart 4)

Weekly Fundamental Forecast US Dollar: November Drop On Track After NFP

Finally, in terms of positioning, according to the CFTC’s TOC for the week ended October 5 speculators increased their net long positions in the US dollar to 32,006 ccontracts from 26,443 contracts. The net long positioning of the US dollar continues to hold near its highest level since the last week of November 2019.

— Written by Christopher Vecchio, CFA, Senior Strategist

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