November Taper on Observe After NFP

Weekly Fundamental US Dollar Forecast: November Taper on Track After NFP

Elementary Forecast for the US Greenback: Impartial

  • Regardless of a disappointing headline determine, the September US NFP report was one other milestone on the street to the Fed tapering asset purchases.
  • Hawkish expectations for the Federal Reserve per bond and charges markets are actually essentially the most aggressive they’ve been all yr.
  • In keeping with the IG Client Sentiment Index, the US Dollar has a blended bias heading into mid-October.

US Greenback Weathering Blended Information

The primary full week of October produced modest positive aspects for the US Greenback (through the DXY Index) after good knowledge releases earlier within the week have been undercut by a disappointing September US NFP report on Friday. The DXY Index gained a mere +0.04%, led by a stronger USD/JPY that gained +1.03%. A weaker EUR/USD, which fell by -0.19%, was offset by a stronger GBP/USD, which added +0.50%. However, bond and charges markets are actually discounting their most aggressive hawkish expectations of the Federal Reserve because the begin of the coronavirus pandemic.

US Financial Calendar Eyes Second Half of Week

The center of October will produce one other busy docket of occasion threat primarily based out of the US. After the September US NFP report, a number of Federal Reserve audio system will probably be in focus, in addition to three ‘excessive’ rated occasions that sometimes produce a major volatility in FX markets. All the important financial knowledge are due within the second half of the week.

  • On Wednesday, October 13,weekly US MBA mortgage purposes and the September US inflation report (CPI) will probably be launched within the morning, whereas the September FOMC assembly minutes and a speech by Fed Governor Lael Brainard will within the afternoon.
  • On Thursday, October 14, Fed Governor Michelle Bowman will ship a speech within the morning forward of the releases of the weekly US jobless claims figures, the September US produce worth index (PPI), and a speech from Atlanta Fed President Raphael Bostic. Within the afternoon, Richmond Fed President Tom Barkin will ship remarks and the September US funds assertion will probably be launched.
  • On Friday, October 15, the September US retail gross sales report, the preliminary October US Michigan client sentiment survey, and the August US enterprise inventories report will probably be launched. Within the afternoon, NY Fed President John Williams will give a speech.

Atlanta Fed GDPNow 3Q’21 Development Estimate (October 8, 2021) (Chart 1)

Weekly Fundamental US Dollar Forecast: November Taper on Track After NFP

Primarily based on the information acquired to date about 3Q’21, the Atlanta Fed GDPNow development forecast is now at its lowest expectation of the quarter at +1.3% annualized. This was on account of “a rise within the nowcast of third-quarter actual gross non-public home funding development from +10.5% to +10.7% was offset by a lower within the nowcast of third-quarter actual private consumption expenditures development from +1.1% to +1.0%.

The following replace to the 3Q’21 Atlanta Fed GDPNow development forecast is due on Friday, October 15.

For full US financial knowledge forecasts, view the DailyFX economic calendar.

Hawkish Fed Nonetheless Anticipated After September US NFP

We will measure whether or not a Fed charge hike is being priced-in utilizing Eurodollar contracts by inspecting the distinction in borrowing prices for business banks over a selected time horizon sooner or later. Chart 2 under showcases the distinction in borrowing prices – the unfold – for the October 2021 and December 2023 contracts, with a purpose to gauge the place rates of interest are headed by December 2023.

Eurodollar Futures Contract Unfold (October 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [RED]: Every day Chart (April 2021 to October 2021) (Chart 2)

Weekly Fundamental US Dollar Forecast: November Taper on Track After NFP

By evaluating Fed charge hike odds with the US Treasury 2s5s10s butterfly, we will gauge whether or not or not the bond market is performing in a way according to what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts within the US yield curve, and if historical past is correct, because of this intermediate charges ought to rise quicker than short-end or long-end charges.

As has been the case for a number of weeks now, frequently elevated Eurodollar spreads alongside motion within the US yield are according to the 2013/2014 interval that means a extra hawkish Fed is quickly to reach.

There are 111-bps of charge hikes discounted by way of the top of 2023 whereas the 2s5s10s butterfly not too long ago reached its widest unfold because the Fed taper discuss started in June (and its widest unfold of all of 2021). Furthermore, consistent with recent chatter from FOMC officials, the primary charge hike appears more and more more likely to arrive in late-2022.

US Treasury Yield Curve (1-year to 30-years) (October 2019 to October 2021) (Chart 3)

Weekly Fundamental US Dollar Forecast: November Taper on Track After NFP

Traditionally talking, the mixed affect of rising US Treasury yields – notably as intermediate charges outpace short-end and long-end charges – alongside elevated Fed charge hike odds has produced a extra favorable buying and selling atmosphere for the US Greenback.

CFTC COT US Greenback Futures Positioning (October 2020 to October 2021) (Chart 4)

Weekly Fundamental US Dollar Forecast: November Taper on Track After NFP

Lastly, taking a look at positioning, in response to the CFTC’s COT for the week ended October 5, speculators elevated their net-long US Greenback positions to 32,006 contracts from 26,443 contracts. Web-long US Greenback positioning continues to carry close to its highest stage because the final week of November 2019.

— Written by Christopher Vecchio, CFA, Senior Strategist

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