Jobs Data Marked Near-term Trend Changes In Jan And Feb; What About Now?

The US dollar's recovery continued last week, with new highs for the year being recorded against the euro, yen, and Mexican peso.  The key driving force is interest rates and ideas that the US monetary spigot will be turned down before Fed officials acknowledge.  The rise in interest rates and inflation expectations are not just the result of the massive US monetary and fiscal stimulus.  OPEC+ have cut output by around 7%, and last week, agreed not to boost production next month, surprising market observers, including ourselves, for example.

The uncertain regulatory environment, specifically, the exemption for Treasury holdings and excess reserves from calculating the liquidity ratio that expires next month, may also be playing a role.  Next week, the US Treasury sells $120 bln of coupons ($58 bln 3-year and $38 bln 10-year notes, and $24 bln in 30-year bonds).   There is no risk that the US auction fails, but it is a question of how sloppy it will be received.   The last coupon sale was the $62 bln seven-year auction on  February 25, which marked an inflection point.  The bids were still two times greater than the offering amount.   Perhaps, a mitigating factor is that the general collateral repo rate is spending more time below zero, which means that one is paid (small) to repo the Treasuries for cash.  

We retain a bearish dollar view for the medium and longer-terms.  Indeed, the very forces that help the dollar now, the large monetary and fiscal stimulus fueled divergence, we think, undermines the greenback in the longer-term through the "twin deficits."  Meanwhile, the US employment data marked a change in the near-term trend in early January and again in early February.  We would not rule out a three-peat as the dollar's recent surge leaves it stretched.  At the very least, some consolidation and paring recent gains seem likely.  

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Read more by Marc on his site Marc to Market.

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