Just felt it is time again to just shed a bit of light in my overall thinking after what has been rather dull few days BUT no doubt, last week was a real relief as a USD bull and a FED hawk…. The Taper story did start to get some more legs I feel.
Just post the ADP disappointment that might have reminded us again on the big NFP miss earlier in the year… we had FED Vice Chair Clarida on the tapes…. I did feel heading into the speech that this speech is probably one of the more important one, given we are in the run up to the late August Jackson Hole meeting…. I was prepared for a hawk (given my views on the FED) , so with pleasure did I see that the dovish leaning Clarida did pull all the stops to deliver a very hawkish message…. And to me, the timing is well placed just a few a few weeks before J Powell delivers his Jackson Hole address.
No doubt, Clarida raised the temperature around the taper discussion and there can just be no doubt at all that Taper is incoming…. Doesn’t yet mean that we might already get it in September BUT the FED meeting in September will be the one where the FED might announce taper for either December or early January BUT there is still also a risk that it starts earlier…..
NFP, came in strong… and as you know my view on employment…. 2020-21 is NOT 2008 and I think the FED has missed the mark on the job recovery by miles…. We see record job openings that start to outpace the number of unemployed….yes, we have big jump in volunteer retirements and yes we seem to have some people that don’t want to return to their old job and then we have those that just will wait to get back into employment until the Government support ends…. Reality is…. most of the issues right now are far away from the FED being able to solve it with QE or anything else…. Wait until the support runs out and people might be back in jobs quicker than you can blink… and one of the next few months might well see a NFP number that is somewhere near 1.5 mio or there about…..
From trying to be politically correct…. With all the pressure the FED is getting from US politicians.. they have for too long looked at the 2008 model.. BUT how on earth can you compare 2008 with 2020… yes, there will be businesses that might not get passed Covid, I get that… BUT just look at some of the charts….. almost in every sector of the US economy , we have job openings at a level NEVER seen before…. and also the reason why some Republican States have ended employment support early, I order to get people back to work… BUT all of this has NOTHING to do with the FED…. They cannot address any of the current imbalances or reasons for the slower path of the recovery..
Inflation… well the usual topic isn’t it… transitory or not… we talked about this for many months now…. and as much as I fully agree that some of the drivers of the higher CPI is driven by Covid related factors… we now also see wage inflation join the game, given the big staff shortages in some sectors, that now has to try and find staff with better pay (maybe a good overall trend)…. What the FED also didn’t foresee and I don’t blame them for that…. that the word “transitory” just has a sudden different time line… while at first we may have thought about 3-6 months… suddenly it may look like 12 to 18 months , with bottle necks not really getting sorted…. The problem of the “transitory” time line is… that businesses will be forced to pass on higher production cost or import costs as it starts to shrink their margin… while at first, they may have hesitated once the economy opened up again But as this time line of transitory gets shifted into the future.. there is no other way than to pass on costs…… which brings me to the point of “transitory” itself… its ok and I do agree that CPI will drop BUT the problem we have is, that maybe the peak in the current cycle is higher than expected (as some FED members did acknowledge) , so what if , even if transitory… CPI will NOT come back down to 2.0% but gets sticky with a 2.5% floor…?
Above all, no matter if you believe the current recovery will not keep the current pace….. what is also true is…. FED policy is set at emergency level… and if we look at all the data around…. We are VERY FAR away from an emergency… so QE at the current pace is just NOT really justified anymore…. And the FED has to react…. And if they try to get ahead of the curve… maybe start in September… can be just by a lousy 10 bio USD if need be… BUT they have to start to buy an insurance… and that insurance is about , WHAT IF we get all this slightly wrong…..
Long story short….. FED Clarida upped the temperature and it is time to prepare for the possibility of Powell to be very hawkish and may leave the impression that the September meeting could well be the one where Taper could already happen (possibly still be December)
The market has NOT embraced the USD all of 2021… .and I still struggle why that is…. yes, I get it… we have negative real rates (Rates minus Inflation) BUT if we are honest, this really only matters for US investors….. the one that USD bears love the most is the Twin Deficit… I think I heard that one since 1984 when I started my FX career and the USD has been all over the place ever since… and don’t forget… Covid wasn’t kind to most countries in terms of finances…. The USD started to slowly turn again in the last few weeks.. got a bit of a Clarida/NFP boost and I think the rest of 2021… people will see that the USD is well the KING again…. maybe post Jackson Hole…… the FED is on the move.. and who knows…the FED might suddenly move a lot quicker than we have priced at the moment.
I have closed my USD longs today which is a pure tactical closure ahead of the US CPI…. With the market always looking for reasons to sell USD… I truly hope they would sell the USD post a tad lower CPI tomorrow to create fresh buy levels…. any dip tomorrow should be used to get long USD and for the USD shorts , I suggest you use the dip , if there is one at all… to cover shorts.
EURUSD is near the lows of 2021 , we have the 1.1695 daily fib support and a low of 1.1704 for the year….. hence given the current levels, maybe another reason to tactically square up…. Break and close below 1.1695 will see the next leg lower in the EUR and that is my Plan B… get back in either in the rally post US CPI or on a clean break of the next support area….
Last but not least… equities… I have NO idea what they are looking at….. the news in recent weeks has clearly shifted more negative… be it with a slow down in H2 expected in China over to Covid making headlines again….. risk FX has drifted lower in the last few weeks… Oil has seen a decent dump on the back of demand worries… just equities living in their own world…. If markets are indeed as efficient as I think they are…. We still have maybe a 10% correction ahead of us in stocks, which means I am NOT only looking to get my USD longs back.. but will also use any rally in Risk FX to sell it…..
Ok that is what is In my head at the moment, which is more or less the same as in many , many weeks BUT I feel we got a gear change last week with FED Clarida and hence why I felt I want to write a quick update
Good luck everyone
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