Goldman Sachs expect the Fed to begin its taper with a November announcement
and September 2022 conclusion to the process
On the USD:
Shifting Fed expectations have supported the dollar over the last two months. But with tapering now largely priced in, and the currency stronger as a result, following through with the process should not drive the Dollar higher from this point forward.
We therefore expect the greenback to stabilize over the coming weeks, and possibly depreciate against certain crosses with attractive domestic fundamentals.
On risks to their outlook, GS say several factors could prevent more sustained Dollar weakness
including surprising strength in this week’s nonfarm payroll report
stubbornly high US inflation
and/or the September FOMC meeting ‘dot plot’, which could show as many as four additional rate hikes in 2024
We forecast broad Dollar depreciation over time on our expectation that the global economic recovery will continue and that slowing domestic growth and lower inflation will allow the Fed to remain on hold until Q3 2023. But for that trend to take hold, markets may require clearer signs that delta variant outbreaks are behind us and that US inflation pressures have come down.
Forex news from the European trading session – 26 August 2021
EUR leads, CHF lags on the day
European equities lower; S&P 500 futures flat
US 10-year yields up 0.8 bps to 1.353%
Gold down 0.1% to $1,789.32
WTI down 0.8% to $67.83
Bitcoin down 3.7% to $46,910
FX was largely muted on the session as the dollar kept steadier amid some light pushing and pulling, not amounting to much change ahead of North American trading.
EUR/USD trades in a narrow range between 1.1760-70 while GBP/USD saw little action around 1.3740-50 levels on the session.
Commodity currencies are also little changed (only a touch softer), nothing to suggest any major change to price action over the past few days.
The overall risk mood was more tepid as European indices dial back following yesterday’s gains while US futures are also not showing much poise amid some trepidation at record levels going into Jackson Hole tomorrow.
10-year Treasury yields are keeping its advance from yesterday, helping to see USD/JPY push to 110.20 before sticking closer to 110.00 currently.
As the week begins to wind down, the focus is turning to Jackson Hole tomorrow and there might not be much in it besides more pushing and pulling before the main event.
Forex news from the European trading session – 20 August 2021
CHF leads, CAD lags on the day
European equities lower; S&P 500 futures down 0.3%
US 10-year yields down 1 bps to 1.23%
Gold up 0.2% to $1,781.10
WTI down 0.7% to $63.25
Bitcoin up 0.7% to $46,900
It was a quiet session overall as the market kept more cautious after the broader retreat in risk trades yesterday, though commodity currencies remain pressured in FX.
The loonie is leading losses as USD/CAD rose by over 100 pips at the highs, building on early gains from 1.2850 to near 1.2950 on the session; now seen near 1.2900.
The aussie and kiwi are also holding lower, with AUD/USD marked down from 0.7140 to a low of 0.7107 before keeping around 0.7120 levels now. NZD/USD moved down from 0.6840 to 0.6807 and is now trading near 0.6825.
Elsewhere, the pound is also under a bit of pressure as cable falls by 0.2% to near 1.3600.
The dollar is keeping steadier overall with little change observed against the euro and yen, even as risk tones are keeping more cautious for the most part.
European indices are down slightly alongside US futures, hinting at a more subdued end to the week although one can’t really rule out another episode of dip buyers coming to the rescue again for US equities late on in the day.
All things considered, perhaps this isn’t the taper tantrum the market was anticipating.
European indices are easing a little after a steadier start to the session, down around 0.1% to 0.3% across the board. US futures have also given up slight gains, with S&P 500 futures marked lower now by 0.1% as the risk mood keeps more tepid.
10-year Treasury yields are a touch higher, up 1 bps to 1.268%, but when putting everything together, it isn’t giving major currencies and the dollar much to work with.EUR/USD is keeping afloat just above 1.1700 around 1.1720 with sellers still poised to try and test the figure level and daily support at 1.1704-11.
USD/JPY is sitting in a 18 pips range and little changed around 109.60 levels.Meanwhile, AUD/USD is holding steady at 0.7250-60 after falling to fresh lows for the year yesterday but remains in a vulnerable spot, all things considered.The kiwi is arguably the big mover on the day and while the currency is trading back lower now around 0.6910, it belies the wild moves ahead of and after the RBNZ policy decision earlier in the day. I shared some thoughts on that here.
The market is rethinking the risk Powell cues up a taper at Jackson Hole and announces on in September. The delta variant, schools reopening and unemployment benefits running out are likely to outweigh inflationary concerns, at least in the latest rethink.
That’s put pressure on the US dollar right across the board today. The catalyst was an extremely soft US consumer sentiment survey from the University of Michigan. It crashed through the pandemic lows to the worst levels since 2011 in a move that nearly no one saw coming.
US 10-year yields are now down 5.8 bps on the day to 1.3085%. That’s spilled over into USD weakness with EUR/USD briefly breaching 1.18. It remains near the lows but the euro daily chart is an interesting one.
Forex news for Asia trading on Friday 13 August 2021
It was a small range session for major FX here in Asia on the 13th. The USD weakened just slightly with a marginal gain for EUR, AUD, NZD, GBP. Yen, CHF and CAD are probably characterised better as unchanged but there isn’t much in it.
The inflation debate is raging in financial markets and we can see just how sensitive price action is after today’s US CPI data. The numbers were generally in line with forecasts and yet the dollar is down sharply across the board.
One example is USD/CAD, which is down nearly 40 pips and through 1.25 to the lowest in four days.
I’m surprised by the size of these moves but it speaks to the taper debate (Sept vs Dec) along with the pace of the taper once it starts. Ultimately though, it relates back to interest rates and if inflation comes down on its own, then there’s no need for the Fed to ever get above something like 1% on fed funds.
What’s interesting to me here is how substantial this move has been on an ‘in line’ print on CPI. That suggests that dollar longs are crowded, something Goldman Sachs recently warned about.
Forex news for North American trading on August 6, 2021
The awaited jobs report was released today at 8:30 AM ET, and it did not disappoint. The net change in nonfarm payroll jobs was 943K. That was above the 870K estimate. Moreover, the June report was revised higher by 88K to 938K, and the May report was also revised higher by 31K to 614K (from 583K).
Overall, with revisions, the US added 1.062M jobs which is good news for the economy.
Making the report even more impressive was that the unemployment rate tumbled to 5.4% from 5.9% last month. The underemployment rate fell to 9.2% from 9.8%. Hourly earnings rose by 0.4%, and the year on year measure is now up 4.0% year on year versus 3.9% estimate (and 3.4% last month).
Leisure and hospitality led with a gains with 380K jobs added.
Government added 240K
Professional business services, +60K
education and health services, +87K
transportation and warehousing, +49.7K
The one cautionary tone is that the local government education category (part of Government) is out of sync with the seasonal adjustments due to Covid. It showed a oversized 220K increase in jobs and may have a “give back” in coming months. Nevertheless, the report was still very solid.
As a result, traders will now be looking for Fed comments as the market prepares for a taper that may/should be sooner than expected.
Fed’s Clarida said this week that he could see a December taper . Fed’s Wallers, Bullard and Kaplan would rather start the taper sooner rather than later so the Fed could have flexibility to tighten interest rates in 2022 if needed. Next week, the market will hear from Fed’s Bostic, Evans, George and Barkin are all expected to speak next week. I would imagine, it will be hard to keep Fed’s Bullard from an interview at some point (he is not shy especially if he is right and he has been one of the more hawkish Fed officials and will be voting in 2022).
Goldman Sachs increased their chances for a November taper to 25% and December 55%. The Fed Chairs Jackson Hole speech (the event takes place from August 26 to August 28) becomes days to circle on the calendar for taper clues.
The reaction in the markets saw:
The USD move higher
Flow in stocks into the Dow cyclicals and out of technology (i.e. Nasdaq)
Higher US rates
Looking the strongest to weakest in the forex market, the USD is ending the day as the run-away strongest of the major currencies. The CHF and the AUD were the weakest.
In the US stocks, the Dow and S&P indices both closed at record levels with the Dow leading with a gain of 0.41%. Leading the charge today were financials which rose 2.01%. Materials (+1.47%) and Energy (+0.94%) were also winners today. Discretionary (-0.73%), real estate (-0.25%) and technology (-0.12%) were the laggards.
The Nasdaq index light with a -0.4% decline after closing at a record level on Thursday. Despite the decline today, the NASDAQ index led the way with a 1.0% gain for the week.
In the European market today, the major indices all closed higher but off their highs levels. The France’s CAC rose by 0.53% and closed at its highest level since 2000. It is only 100 points or so from its all-time record high.
In the US debt market, yields this week trade as low as 1.127% in the benchmark 10 year yield. The yield is going out the week at 1.293% up nearly 16 basic point from the weeks low. Next week will be a key test for the global demand of US debt, as the U.S. Treasury will auction off:
$58 billion of 3 year notes on Tuesday,
$41 billion of 10 year notes on Wednesday, and
$27 billion of 30 year bonds on Thursday.
In other markets today:
Spot Gold tumbled $41.50 or -2.3% to $1762.76
Spot Silver fell $0.83 or -3.33% to $24.29
WTI crude oil futures felt $-1.14 or -1.66% at $67.97. For the week, crude oil fell over 7% from Friday’s closing levels
The price of bitcoin rose $1838 to $42,733.48. The price is trading at the highest level since May 19, 2021. The 200 day moving average going into the weekend is currently at $44,822. Will traders squeeze the price toward that key MA level? I would not be surprised.
Wishing you all a great and healthy weekend. Thank you for your support this week.