Was Last Week An Inflection Point For The Dollar?

For several years now, many have asked themselves where the bond vigilantes, those bond bears that push back against "QE forever" and never-ending government deficits. They appeared with a vengeance last week.  Many investors took comments from Federal Reserve officials, especially the leadership, as evidence of complacency over inflation. The market also concluded that the Bank of England was more likely to hike rates by the end of next year than adopted negative rates, which had seemed like a distinct possibility a few short weeks ago. 

We have argued that if a central bank, like the Fed, were to step away from the market and end the long-term asset purchases, it is likely that after the headline shock, yields would fall. As monetary support for the recovery/expansion was removed, the economy would weaken.  Even with central bank buying, we had been persuaded that investors' views of growth and inflation ultimately drove bond yields in the G7.  In the past month, the US 10-year yield has risen by 44 bp, and the UK yield has increased by 53 bp. Australia has seen an 80 bp increase.  German and French yields rose by almost 30 bp.  

The impact of the vaccine and the massive fiscal stimulus is rippling through the system.  Between December's package and the one that will be approved in March, the US is on the hook for about 14% of GDP.  The UK may extend its support next week and announce as much as another 5% of fiscal assistance (spending increases, like the furlough program, and give some tax breaks (VAT?) to small and medium-sized businesses that have been decimated by the pandemic and lockdowns.    

With this in mind, we turn to the price action in the currency market:

Dollar Index:  After going nowhere for a few days, but fraying support near 90.00, the Dollar Index fell below 89.70 on February 25, its lowest since January 8.  A dramatic swing in Fed expectations helped spark a recovery, and additional gains were registered into the weekend when it approached 90.80.  The MACD has trended lower throughout the month but appears poised to turn higher. The Slow Stochastic is at its lows for the year and may also turn higher shortly.  The pullback from the early February high, around 91.60, was deeper than we had anticipated, but the firm close (at a six-day high) is promising.    It must get above 91.00-91.10 to be anything significant (UDNUUP).

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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