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Taper Speak to Intensify at September Fed Assembly


Weekly Fundamental US Dollar Forecast: Taper Talk to Intensify at September Fed Meeting

Basic Forecast for the US Greenback: Impartial

  • The US Dollar (by way of the DXY Index) gained +0.65% final week on the again of rising Fed fee hike odds.
  • Bond and charges markets at the moment are essentially the most aggressive of their hawkish expectations of the Federal Reserve all 12 months.
  • In response to the IG Client Sentiment Index, the US Greenback has a bullish bias forward of the September Fed assembly.

US Greenback Goals Larger

After a rocky first few days, the US Greenback (by way of the DXY Index) gained +0.65% final week on the again of rising Fed fee hike odds. Bond and charges markets at the moment are essentially the most aggressive of their hawkish expectations of the Federal Reserve all 12 months. The most important element of the DXY Index, EUR/USD charges, dropped by -0.71 %, whereas USD/JPY charges gained +0.09%, hampered by weak point in fairness markets.

Elsewhere, positive factors by the dollar have been equally if no more pronounced: GBP/USD fell -0.69%; AUD/USD dropped -1.18%; NZD/USD sank -1.06%; and USD/CAD added +0.65%.

US Financial Calendar Packed, Eyes on Fed Assembly

The center of September will produce one other busy docket of occasion danger primarily based out of the US. In fact, lots of the knowledge releases may even see diminished significance because the September Fed assembly dwarfs all else.

  • On Monday, September 20, the September US NAHB housing market index can be launched.
  • On Tuesday, September 21, August US constructing permits and August US housing begins knowledge are due.
  • On Wednesday, September 22, weekly US MBA mortgage purposes and August US present house gross sales can be launched within the morning, whereas the September Fed assembly and press convention by Fed Chair Jerome Powell will happen within the afternoon.
  • On Thursday, September 23, the August US Chicago Fed nationwide exercise index, weekly jobless claims figures, the September US Markit manufacturing PMI (flash), and August US CB main index are all due.
  • On Friday, September 24, the August US new house gross sales report can be launched and Fed Chair Powell will ship a speech.

Atlanta Fed GDPNow 3Q’21 Progress Estimate (September 17, 2021) (Chart 1)

Weekly Fundamental US Dollar Forecast: Taper Talk to Intensify at September Fed Meeting

Primarily based on the information acquired up to now about 3Q’21, the Atlanta Fed GDPNow development forecast has been downgraded from +3.7% to +3.6% annualized. This was as a result of “a lower within the nowcast of third-quarter actual gross non-public home funding development from +19.2% to +18.9% was partially offset by a rise within the nowcast of third-quarter actual private consumption expenditures development from +2.1% to +2.2%, whereas the nowcast of the contribution of the change in actual web exports to third-quarter actual GDP development elevated from -1.41% to -1.37%.

The subsequent replace to the 3Q’21 Atlanta Fed GDPNow development forecast is due on Tuesday, September 21.

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

Bond Market Anticipating a Hawkish Fed

We will measure whether or not a Fed fee hike is being priced-in utilizing Eurodollar contracts by inspecting the distinction in borrowing prices for industrial banks over a particular time horizon sooner or later. Chart 1 under showcases the distinction in borrowing prices – the unfold – for the September 2021 and December 2023 contracts, with the intention to gauge the place rates of interest are headed within the interim interval between September 2021 and December 2023.

Eurodollar Futures Contract Unfold (September 2021-DECEMBER 2023) versus US 2s5s10s Butterfly: Each day Fee Chart (September 2019 to September 2021) (Chart2)

Weekly Fundamental US Dollar Forecast: Taper Talk to Intensify at September Fed Meeting

We will overlay Fed fee hike odds with the US Treasury 2s5s10s butterfly with the intention to gauge whether or not or not the bond market is performing in a fashion just like what occurred in 2013/2014 when the Fed started to maneuver ahead with its taper plans. 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 sooner than short-end or long-end charges.

Certainly, whereas Fed fee hike odds have been largely unmoved after the July FOMC minutes – which clearly acknowledged the delineating between tapering and fee hikes – we are able to see that the US yield curve is transferring in a fashion that means a extra hawkish Fed is right here. Whereas there are 97-bps of fee hikes discounted by way of the top of 2023, the 2s5s10s butterfly elevated to its highest fee for the reason that Fed taper discuss started in June 2021, and its highest total since June 2018.

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

Weekly Fundamental US Dollar Forecast: Taper Talk to Intensify at September Fed Meeting

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

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

Weekly Fundamental US Dollar Forecast: Taper Talk to Intensify at September Fed Meeting

Lastly, taking a look at positioning, in keeping with the CFTC’s COT for the week ended September 14, speculators elevated their net-long US Greenback positions to 24,244 contracts from 21,458 contracts. Web-long US Greenback positioning is holding close to its highest stage for the reason that final week of November 2019.

— Written by Christopher Vecchio, CFA, Senior Forex Strategist





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