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The Dollar Index Breaks Higher - A MirageAfter trading at the highest level since 2002 during the risk-off period when COVID-19 spread worldwide like a wildfire, the US dollar index fell, making lower highs and lower lows from March 2020 through January 2021. The index fell from 103.96 to a low of 89.165, a 14.2% decline in the index that measures the dollar against other world reserve currencies. The Fed tightens without tightening credit The dollar index breaks above a technical level The greenback remains in a medium-term bearish trend The long-term trend is higher Fiat currency moves are a mirage for one critical reason After consolidating around the 90 level from mid-May through mid-June, the dollar index took off on the upside in the aftermath of the latest Fed meeting. While the dollar has moved higher and eclipsed a short-term technical resistance level, the medium-term trend remains bearish. To confuse matters, the long-term trend dating back to 2008 is bullish for the US dollar index. Governments and monetary authorities manage currency markets to provide stability for global financial markets. Meanwhile, the overall foreign exchange market is more than a mirage because it is not readily apparent if the asset class gains or loses value in a larger sense. The bottom line is that the dollar and other fiat currencies rely on the full faith and credit of the governments that issue the legal tender. The dollar may be rallying against other currencies, but it can also be losing purchasing power making the entire currency market a farce. The Fed tightens without tightening credit At the June Federal Market Committee meeting, the US central bank left the short-term Fed Funds intact at zero to twenty-five basis points. The committee said it would leave its quantitative easing program unchanged and continue to purchase $120 billion in debt securities each month. The only change was a slight increase of five basis points in the reverse repo rate. The bottom line is the Fed continued on its accommodative monetary policy path. Meanwhile, the central bank increased its GDP growth forecast from 6.5% to 7% and its inflation expectations from 2.5% to 3.4%. While very little changed, the rhetoric shifted towards tighter credit policies as the Fed acknowledged rising inflationary pressures. Seven committee members project a rate hike in 2022, with two expecting two increases in the Fed Funds rate. The markets viewed the statements and rhetoric as a sign that tighter policy is on the horizon and tapering QE will occur sooner rather than later. Commodity prices fell in the wake of the Fed meeting as rising interest rates increase the cost of carrying raw material inventories and financing production. The dollar moved higher as interest rate differentials are a critical factor for the value of one currency versus another. The dollar index breaks above a technical level The dollar index took off on the upside in the wake of the June FOMC meeting, surpassing a short-term technical resistance level. The daily chart of the September dollar index futures contract illustrates the move above the May 5 91.41 high on June 16, the day after the June Fed meeting. The index rose to a high of 92.395 on June 18 before correcting. At the end of last week, the September dollar index settled at the 91.844 level, above the breakout level at 91.41, which is now technical support. The prospects for higher US interest rates were bullish winds in the dollar’s sails. The greenback remains in a medium-term bearish trend While the dollar index rose above a technical resistance level, the greenback remains in a bearish medium-term trend despite the recent rally. The weekly chart shows that the index has made lower highs and lower lows since March 2020. To negate that bearish trading pattern, it needs to rise above the critical resistance level at the 93.47 level from the week of March 29, 2021. If the dollar index stalls and fails to rise above that high, it will put in another lower peak to continue the bearish trend over the past fourteen months. The long-term trend is higher To confuse matters, the dollar index’s long-term technical picture remains bullish over the past thirteen years. The quarterly chart highlights a pattern of higher lows and higher highs for the dollar index since reaching a bottom at 70.805 in early 2008. With a bullish short-term trend, a bearish medium-term pattern, and a bullish long-term trend, the path of least resistance of the US currency against other world reserve currency remains in doubt. However, it may not matter if the dollar index moves higher or lower against the euro, yen, pound, and other leading fiat currencies. The index could be a mirage masking the overall weakness in the foreign exchange arena. Fiat currency moves are a mirage for one critical reason The foreign exchange market only measures the value of one currency versus another. The price differentials tell us nothing about purchasing power other than if one foreign exchange instrument is trending higher or lower against another. The recent rise in the dollar index that followed on the heels of a more hawkish tone from the Fed could be a mirage. The bottom line is the dollar’s purchasing power has been declining. The May CPI data shows a 5% increase and a 3.8% rise, excluding food and energy. While many commodity prices corrected lower in June, crude oil and natural gas made new multi-year highs. The energy commodities power the US and the world. Rising prices are inflationary. Inflation erodes the value of money, making it more expensive for consumers to purchase essentials. While the dollar index recovered from the 90 to around the 92 level, the move is a mirage that masks the long-term trend in all fiat currencies. In 2019 and 2020, gold reached a record high in all fiat currency terms. Gold in euros, pounds, yen, dollars and most other foreign exchange instruments rose to record levels. Central banks hold gold as an integral part of their foreign exchange reserves, making the yellow metal a reserve currency alongside the dollar and the euro. The bottom line is that inflationary pressures continue to rise. The dollar index could continue to power higher over the coming days, weeks, and months, but the US currency could be weakening at the same time. A pivot towards a more hawkish approach to US monetary policy may lift the US currency, but that may only make the dollar the healthiest horse in the glue factory. 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ICEUS:DX1!
by Andy_Hecht
XAUUSD 15M EntryMorning Traders, Quick 15M entry here on Gold, the metal has been consolidating over the last 24 hours, most likely in preparation for the number of Fed speeches coming up this week including Chair Powell's speech this afternoon. The metal looks hesitant to move bearish or bullish after a strong week by the dollar last week, with the fed announcing interest hikes in 2023 (earlier than expected). After the USD strong finish to last week, the bulls retreated and avoided attempting to recover any lost ground. This week however the metal could make a bullish charge toward 1800 as the interest rate hike news dies down and reality hits many that the pandemic is still ongoing (though ending soon hopefully) and that we are still going to experience many more shocks and waves from the pandemic and government spending. The cliche of unprecedented times is never so evident as it is right now with US inflation surging and the S&P 500 hitting all time highs. However, on the 15M chart we can see a false breakout of the 15 minute trend only to see the metal return within its trend lines, the metal broke the trend and pushed at 1785 for only an hour so before returning to the gradual climb we've seen over the start of this week. This may have dragged a few bulls into earlier than anticipated positions for the push towards 1800 but we are now seeing some reinforcing analysis on the opposite side of the trend with Gold breaking the lower trend line and pushing towards 1775 in the midst of the Asian session. We are sitting in the middle of another false breakout which is prime position to take up stance for the return to trend and a hoorah towards 1800 as we push for the psychological level and hope to turn the resistance to support. The sheer fact that the hawkish turn by the fed has turned so many heads and created such volatility shows cloudiness within the markets and really highlights the weird and uncertain times that we are in. I feel the fed will turn towards caution after the market reaction and will urge caution within Fed powell's speech. This will ultimately drive us towards the 1800 mark as metals are safe havens during uncertainty and the suggestion of caution will only reiterate further confidence into the metal over the next few weeks. Hope you enjoy and happy trading!
FOREXCOM:XAUUSDLong
by KaineArkinson1
TLT. for chuck555. Hope you like it.I think the way the markets are all linked and pull and push on one another is really fascinating, however, in most of the books I've read it says that you should stay away from that type of predictive trading and just do what the market is showing you on the charts. I think trying to piece everything together is fun, but again, I've read so many accounts of traders who place positions because they think they know what the market is going to do, then the news comes out exactly as they predicted and the market accommodates by twisting and bending in a way they were not expecting. For this reason, I like to keep it simple. This is probably why I'm only joining trends midway through, but I'm not placing life changing positions. Still, I think it's all very interesting, and today I learned a little bit about the correlation between bonds, inflation, and rates expectations. Inflation up = interest rates up. Interest rates up = bonds down. Bonds down = stocks up. Stocks up = gold down? gold down = what? and where does bitcoin fit into this? How much does a sailboat cost?
NASDAQ:TLT
by emehoke
2
The initial downside, before the moon mission for GOLD?After seeing classical price action for a traditional correction (from an Elliot waves perspective), the commodity started a trendy price action to the upside. It looks like that the top for these three impulses is finished, and a correction has begun. The price objectives for this correction are based on Fibonacci levels (0.382 - 0.618). Overall, once the correction finishes, higher prices have to be expected if GOLD trades above 1732.6 USD. Together, we will find if this trendy price action may correspond to the first wave of a more significant three impulse waves.
TVC:GOLDShort
by LiquidityMaster
3
Chart of the day: Rates markets are pricing...Rates markets are pricing in faster policy normalization for the BOE With the Bank of England just a few days away, it’s always a good idea to reflect on the rates market and see what it’s pricing in. Looking at the SONIA quarterly futures rates we can see that markets are pricing in much faster policy normalization for the UK compared to the likes of the FED. SONIA futures are pricing in a first hike from the BOE by SEP 2022 (compared to March 2023 for the FED), and a total of 3 hikes (assuming 10bsp each) by March 2023. How does this information help us? It is helpful as it shows us a bit of a disconnect between the recent weaker price action, we’ve seen in sterling versus what the rates markets are implying for policy normalization. Thus, even though a lot of policy normalization expectations are baked into the rates market, the same is not reflected in sterling’s price action just yet. For now, consensus is not expecting the BOE to follow, the BOC’s lead by tapering asset purchases. But arguably the bigger focus will fall on the BOE’s rate hike projections.
CME:SONZ2021
by thunderpips
March rate cuts had nothing to do with COVID...but the pandemic offered pretext to take dramatic action when it was already needed. When J. Powell started announcing rate cuts after the late 2019 'taper tantrum', nobody was surprised, either by the cuts or their size. These were modest cuts announced in successive FOMC releases. All seemed normal and the market appeared to take a breather on slightly lower rates. Then something peculiar happened in March 2020. Powell announced quite large rate cuts, not once, but twice, in two weeks, outside of the FOMC schedule. The pretext of course, was the pandemic, but the timing might suggest otherwise. Looking at the band of yields, you can see that the curve was already collapsing in January and February. The histogram displayed with the yield band is a composite indicator of all yield curves, each duration being weighed against the next. It appears that the rate cuts announced during FOMC after the 'taper tantrum' were insufficient to set the curve free, and it was still collapsing under higher rates. Powell needed to act quickly and aggressively. The pandemic offered the pretext of an outside threat to the economy. A one-off black swan event. This allowed taking action without having to explain that the bond market was already in deep trouble. The timing of the out-of-schedule rate cuts were both on days that the US10Y broke below key support.
TVC:US10Y
by iamroot
1
Is inflation coming? In short, we don't think so. In the chart above, you're seeing the 10y30y spread and the 10y yield. The 10s30s is a barometer of the inflation risk premium. And quite frankly, the market isn't buying that inflation will be sustained. Yes, the 10y yield is indicating perhaps to many that there is some kind of inflation risk, but from the Macrodesiac view, all that is being exhibited here are base effects. Take a look at the US 10 year yield (the risk free rate of return) over the last 20 years, and come to a conclusion as to whether we are in an abnormal market or not. The upper bound is likely capped at 2-2.5% at the max. This would not inspire the extent of inflation that many are warning about, and the Fed is consistent with this view as well. An excerpt taken from the Macrodesiac note yesterday... 'Back in late August last year, Powell stepped up to the podium at Jackson Hole (well, it was online), where he outlined a different policy path of Average Inflation Targeting. Here's where an understanding of that above paper comes into play. " f inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." It's all about signalling. The central bank can't automatically push prices up. They can only provide behavioural signals to the market to either consume or save. That is it. The problem comes when there are broader issues at hand that might make the actual mechanism of achieving policy goals, defunct. The main one that I have been focusing on of late is of course demographics, and the labour market, which are intertwined.' Now, let's talk about those demographic issues. Below is the labour force participation rate for the US. What I would like to know is how inflation is to be sustained when we have 2% of the available workforce that have taken themselves out of even looking for work on a year on year basis? You can provide all the stimulus checks you like, but all that is doing is providing a push back to a prior baseline - if fewer people have incomes, there is less consumption, so one of the primary drivers of inflation is dampened. And with regards to the recent NFP figure of +376,000 new jobs being created in a month, we would have to see that figure be printed month on month until April 2023. Not so inspiring, is it? Your eyes may now switch to the savings rate as a critique of what I am suggesting. The problem here is that this is a ridiculously skewed measure too. For retirees and the highest income earners, they have captured most of this increase in savings. But for the poorer income quartiles, they have experienced a broader deterioration in their household savings rate. When you look at data on consumption broken down by income, you find that the highest marginal propensity to consume segment is the richest households with low liquid savings and high illiquid savings... But right now, they have both. The next highest (and is generally consistent through time) is the lowest and middle households. However, they do not have spare cash to spend! The pent up demand argument is failing, and I'd argue is more a bubble in financial media and commentators where they are on higher salaries, their family members are too and they (me too) have largely been shielded from the economic fallout of the past year. Now, I've also got into debates around something a little more concerning too, and that is to do with TIPS (Treasury Inflation-Protected Securities). You might not have heard of this, but it's effectively a way to protect yourself against the rise of inflation. I'll take another excerpt from the note written yesterday... 'There's a big problem with this measure. The Fed has been buying Treasury Inflation-Protected Securities! The Fed’s buying of TIPS could drive down TIPS yields and drive up the breakeven measure of inflation expectations. So what we are perhaps seeing here is the market using a key measure of inflation expectations to gauge the macro picture moving forwards, without actually realising that it's distorted. 'But breakevens are high!' is probably the reply that you might get back if you mention a number of factors that contend with the longer term inflation view. My question then would be to ask whether this would have some effect across the nominal yield curve, causing yields to spike higher and with greater speed, than they should? This paper might prove key to answering what's going on here. "Such expectations proxy a situation in which the public does not understand the full structure of the economy and, hence, cannot anticipate the implications of policymakers’ intention to make up for past deviations of inflation from its objective. By varying the number of economic agents (and, hence, components or blocks) in the FRB/US model who use VAR-based rather than model-consistent expectations, we can adjust the extent to which the public understands policymakers’ commitment to a makeup strategy and the degree to which aggregate economic variables react to news about the future." The paper concludes with... Makeup strategies work best when the public understands, believes, and reacts to policymakers’ commitment to offset misses in inflation from the 2 percent objective in the future.' What we are currently seeing in the market, from my point of view, is merely the Fed signalling that they want to make up for missed inflation goals over the past year and probably before as well. Now they have the fiscal support, it sounds to them like it might be the right time to do so. This is most notably seen through Powell's speech at Jackson Hole back in August where he introduced the Fed's new mandate of 'Average Inflation Targeting'. What I would wonder, specifically to do with TIPS, is whether traders know that the Fed has distorted the TIPS market, since 5y5y inflation swaps have followed it, and have almost gone in lockstep with the Fed's holdings of TIPS. This would be cause for concern, and if it is understood, alongside the waning macroeconomic indicators, then this would provide a strong basis for the current differentials in rates pricing, and for the inflation narrative to subside. Welcome normality.
TVC:US30Y
by FinkPro
129
A "surge" in yieldsWord on the street is that real rates are surging. SURGING, I tell you!! The financial press gets caught up in the moment, swept along in the excitement, elation, and fear of any directional market move. During such times, it is especially valuable to step back, look at the bigger picture, and ascertain if the long-term prevailing trend is at risk of a breakout or reversal. Take the US 10-year yield: Looking at a monthly chart, we see 40 years of a very clear downward trend. That "surge"? Well, look for yourself. Barring something as extreme as China throwing a firesale on US paper, I expect this trend to continue for quite a while longer. There is a lower bound to yields, but that bound is continually being pushed lower as rates are cut, other central banks foray into negative rates, and investors/funds begin seeking the 'least-worst' store of value. This demand shift pushing the lower bound lower is what has formed the lower bound of the downward trend channel on the chart. I'm dubious about this 'reflation trade' story: The search for yield, and even simply 'least-worst' store of value is the prevailing force in this market. US treasury yields can only outperform so far in the broader market of debt instruments before they attract more buyers. Negative rates in other nations have intensified this effect. This behavior forms the upper bound of our downward trend channel. Perhaps we'll see by the end of December if this "surge" is an actual SURGE. For myself, I will be respecting the strength of this 40 year trend, and expecting any strong upward move in yields to only tag the upper bound of the channel, (if even that far), before reversing to the downside.
TVC:US10Y
by iamroot
3
Money Supply, Velocity, Inflation, Rates & the Federal ReserveI was taught in undergrad that adding to the money supply is inflationary . The logic was, you print more bills; the existing currency gets diluted in buying power. Following the ‘Crises of 2008’ the Fed launches Quantitative easing and purchases long term securities increasing the money supply and lowering rates. This activity would result in more investment and encourage lending. Keep in mind the lever the Fed historically wielded was changing the short-term interest rate, so by lowering the discount rate that banks pay on short term loans from the Fed, the Fed is able to provide liquidity and – ease. Monetary Policy's version of stimulus. Quantitative Easing was much more potent and was a lever that enabled much more control for the Fed, and control over a longer time frame. Keep in mind the mandate of the Fed: Maximum Employment Stable Prices Moderate Long-Term Interest Rates One can see that the Fed's tool kit was easily justified by the Board of Governors as they sought to fulfill Congress’ mandate. Not to mention the stability here is global, at least the Fed is responsible for keeping everything stable. This status for America globally is a great privilege. Many Americans are not cognizant of what this affords to us as individuals in this nation. QE did result in in inflation, but the environment has not been unruly with any problematic inflation , and we certainly did not get any Hyper-Inflation like so many economist were shouting about, especially those grounded in traditional economic ideology. This new environment has me wondering again how this will all play out of course as the parts at play are each so multifaceted. With that said, I would think we see inflation rise especially with the macro environment of easing and potential fiscal policy and the Federal Funds rate being this low. With that said, the biggest concern I have with this thought process is curiosity of what was stated by Jerome Powell in the last FOMC meeting – rates will be at these levels near the zero-bound (limit of 0% for short-term rates) with the Fed setting a higher target for inflation . Keep in mind the Fed has never been able to hit their recent targets for inflation for years, yet now they want the target even higher. With that thinking in mind, he seemed to indicate the reason the Federal Funds rate can be so low for so long is because inflation will not even be getting to their own target, just as it hasn't in recent memory. Again I still have a bias towards a weaker dollar and inflation – I am however readily willing to change my mind on a moments notice here as we see what actually transpires. I have an alternative to all the "deflation" vs "inflation" debates - an environment that will be stable with just modest inflation. Please be sure to comment, debate and let me know where you think the dollar goes next.
FRED:WM2NSEducation
by ZenMode
88
Inflation hints at potential moves for Gold and USDRising inflation has been the question many analysts, investors, and traders want answers to. Fortunately, these answers may come soon as Federal Reserve Chairman Jerome Powell is set to take the stage (virtually, of course) to address the future of US Monetary Policy post Coronavirus and, hopefully, answer the myriad of questions regarding the Fed’s stance on inflation.​ It is the Federal Reserve’s mandate to have inflation hover around 2%. However, with low inflation rates before the pandemic, Jerome Powell runs the deflation risk due to US citizens not being employed. Analysts predict that the Fed will release a new tool to increase inflation for a more extended period, increasing growth and pricing power. Rick Rieder, BlackRock’s Global Chief Investment Officer of Fixed Income, stated that “the rate markets are anticipating the Fed is going to be dovish and willing to withstand inflation being higher for a more extended period. Currently, the Dollar Index sits just under 93 alongside Gold sitting at $1,943 an ounce. Both are suspectable to change in policies regarding inflation, with both gearing up for a move that would see Gold strengthen and the US Dollar weaken even further if Jerome Powell hints at pumping up inflation. What’s the link between Gold and inflation? You always hear people say, “Gold is a safe haven” However, you may not know why, only that when stocks are selling off, Gold is picking up. What is one of the “haven” attributes that people state as a reason for buying gold? As you can guess by the article – Gold and inflation go hand in hand. That is, as inflation increases, so do, theoretically, the price of Gold. We could go into the nitty-gritty side of things, take out our Econ 101 books, and talk about M1, M2, and M3 money supply, etc. However, what it boils down to is the supply and demand of money versus the supply and demand of Gold. We all know that the Federal Reserve has been printing money as a drastic attempt to curve the Coronavirus’s economic effects on the financial markets. However, this increase in the supply of money risks the devaluation of the US currency. As supply and demand states, an increase in supply, Ceteris Paribus, decrease the price. In this case, an increase in supply implies an increase in spending and demand for goods and services, incentivizing businesses to increase their prices – inflation! If the price of goods and services increases, one US dollar buys less, therefore losing its value. Gold is historically resilient against inflation However, the supply of Gold is relatively set year over year, alleviating the problem money has as there is no central bank increasing/decreasing the supply. Since inflation does not affect Gold’s value, the logic holds that people would instead hold Gold since it will not lose its value through periods of inflation, unlike the US dollar. Inflation also affects many US dollar-denominated bonds. Bondholders get paid a set amount of interest. However, when inflation rises, the real yield the bondholders get paid gets diminished. Real yield is calculated by the nominal interest rate subtracting the inflation rate. In a 0% interest rate environment alongside rising inflation, sees real yields drop into the negatives. Negative real yields push investors away from the US dollar and into other positive or even neutral assets like you guessed it… Gold. So why inflation? With all these consequences regarding inflation – why is Jerome Powell insistent on maintaining their 2% guidance? Inflation is essentially a bi-product of stimulus that the Central bank and the government implement. Essentially, the government and central banks’ goal is to get the economy moving by increasing employment and increasing the number of money households have to spend throughout the economy. An increase in demand for goods and services incentives businesses to increase their prices, hence inflation. However, there is a more critical reason why Jerome Powell wants to try and spur inflation – its that he does not want the opposite, deflation. Deflation is when prices of goods and services decrease. This is a destructive cycle for an economy to enter into as consumers get into the mindset – “Oh, prices are going to get cheaper in the future? I will just wait then.” – However, that is a whole other topic. For now, all eyes on the head of the money printer, the US Dollar, and Gold.
TVC:GOLD
by BlackBull_Markets
1