Fed Hike Ideas Give The Beleaguered Greenback Support

The euro peaked yesterday near $1.2245, its best level since January 8. It closed around $1.2175 and has been sold to about $1.2115 in the European morning. The $1.2100 area may offer initial support and this month's trendline comes in near $1.2085. The euro finished last week by $1.2120. Although the euro has been trending higher, it has been alternating between weekly gains and losses since the middle of January. Recall that the week before(ending February 12), the euro also settled near $1.2120. Given the dramatic action in stocks and bonds, month-end adjustments are a wild card today. Sterling peaked in the middle of the week near $1.4240. It fell yesterday to $1.40, and today it tested $1.39.  Today's low corresponds to the (50%) retracement of this month's rally (from the February 4 low below $1.36). The 20-day moving average is near $1.3865, and the (61.8%) retracement is closer to $1.3825. 

America

The implied yield of the December 2022 Eurodollar futures contract rose to 50 bp yesterday (from 33 bp at the start of the week). This would be consistent with a 25 bp rate hike a year before the Fed has suggested it is likely to do so. Investors see the large fiscal stimulus and anticipate a booming economy. Some conclude this means a Fed hike is expected sooner than officials acknowledge. The contract is a little changed today, ahead of the US session, implying a 44 bp yield. It was at 27 bp at the end of January. At the same time, the overnight repo rate traded down to minus 10 bp yesterday, reflecting the scramble for places to park funds in the pace of smaller T-bill issuance as the Treasury reduces its cash position.  

The reconciliation process under which the stimulus plan can pass with a simple majority works requires that the components are only for fiscal policy. The Senate parliamentarian ruled that the minimum wage increase does not fit the requirement. Cutting taxes or boosting spending is actions that government takes. That is fiscal policy. The minimum wage is not seen as a fiscal issue. However, the US government is among the largest employers of minimum wage workers through contracts of vendors and clerks and maintenance at parks and museums, etc. There will be an attempt in the Senate to modify it to overcome the parliamentarian's objections. The House of Representatives is expected to approve as early as today the stimulus measure, with the minimum wage increase. 

Today's economic calendar features the January personal income and consumption figures. Income will be boosted by the $600 checks from the government, while the surge in retail sales points to a strong gain in consumption after declining in November and December. The January deflators are likely to be little changed, around 1.4%. The Fed targets the headline rate at 2.0% but talks a great deal about the core rate. Canada reports raw material prices, which tend not to elicit a market response. Mexico reports its January trade balance. Economists look for a small deficit ($600 mln) after December's $6.26 bln surpluses. It will be the first deficit since last May. The trade deficit stood at $2.48 bln in January 2020.

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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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