Rising yields on US Treasuries may not help the greenback; NFP in April due
Fundamental US Dollar Forecast: Neutral
- The decline in the US dollar occurred even as yields on US Treasuries stabilized (if not increased), suggesting that rising inflation expectations – not real US yields – are on the way. origin of this development, which has always been bad for the greenback.
- The main economic event of the week will be the April report on the non-farm payroll in the United States, due on Friday, May 7.
- According to the IG Client Sentiment Index, the US dollar has a mixed bias as the first week of May approaches.
The US dollar stumbles in May
The US dollar (via the DXY index) was able to recover at the end of the week, perhaps thanks to the rebalancing flows at the end of the month. This was a much needed relief for the DXY index, which closed April down -2.08% – beating average seasonal trends over the past 5 and 10 years. With US economic data outperforms and higher commodity prices, there has been a rise in nominal US yields (Treasury bills) and inflation expectations (breakeven points).
In a sense, the rise in yields on U.S. Treasuries has been a “ false flag, ” as the emergence of deeper negative real U.S. yields in 2020 has gone hand in hand with a weaker U.S. dollar. The backdrop that facilitated these U.S. dollar losses at the end of 2020 looks set to stay in place for the foreseeable future.
Stay on the narrow path
Federal Reserve policymakers gathered for their April meeting last week, and there probably couldn’t have been a more mundane reaction from the market. But it’s a good thing as far as the FOMC is concerned, to the extent that little or no volatility around their meetings and press conferences by Fed Chairman Jerome Powell means that in fact politics is being factored in; markets still believe the Fed has its hands on the proverbial wheel.
Federal Reserve interest rate expectations (April 30, 2021) (Table 1)
Fed policymakers were extremely disciplined with their messages in recent weeks, on and around the April Fed meeting in particular; there has been a clear and resolute drumbeat that interest rates will remain low as long as the US economy remains threatened by the coronavirus pandemic. As has been the casting for weeks, Federal funds futures less than a 10% chance of a Fed rate change until January 2022. Oddly enough, with only a slight suspicion that inflationary pressures aren’t just transient – Fed Chairman Powell called them “largely transient,” nitpicky – yields on US Treasuries have started to rise again.
Yield curve for US Treasuries (1 to 30 years) (January 2020 to April 2021) (Chart 1)
The recent rise in yields on US Treasuries has not translated into a stronger US dollar, however, and for good reason: inflationary pressures, as measured by the 5 and 10 year breakeven rates. As the Federal Reserve signaled this week at its April policy meeting, the plan is to keep the main rate low for the foreseeable future.. Therefore, with cereals like corn and wheat and metals like copper which have recently seen rapid price appreciation, rising short-term inflation expectations continue to outperform gains in US Treasury yields. The US Treasury reports are nominal, and inflation expectations exceeding yields means downward pressure on US real rates may appear again.
Risky US Economic Calendar
The first week of May brings what can be seen as a cornucopia of event risk for the US dollar. The economic calendar is oversaturated with event risk, likely providing traders with plenty of opportunities to catch bouts of volatility from USD pairs over the next few days after a quieter (albeit still negative) April:
- At On Monday, May 3, the April US Markit Manufacturing PMI and US ISM Manufacturing PMI reports will be released just after the opening of equity in New York. Also on Monday, Fed Chairman Powell will speak. The Atlanta Fed’s GDPNow growth tracker for 2Q’21 will be updated for the first of three times this week.
- On Tuesday, May 4, the March U.S. Factory Orders Report will be released. The Atlanta Fed’s GDPNow growth tracker for 2Q’21 will be updated for the second time.
- On Wednesday, May 5, the ADP US employment development report for April is due, as is the April US ISM non-manufacturing PMI and EIA energy inventory data for the week. completed April 30.
- On Thursday, May 6, initial US jobless claims data for the week ended May 1 and continued US jobless claims data for the week ended April 24 will be released.
- On Friday, May 7, the April US non-farm payrolls and the US unemployment rate figures for April are expected along with the US wage growth figures for April. The Atlanta Fed’s GDPNow growth tracker for 2Q’21 will be updated for the third and final time of the week.
Atlanta Fed’s current GDP growth estimate in 1Q21 (April 30, 2021) (Chart 2)
Based on the data received so far, approximately 2Q’21 – which, of course, is not that much – Atlanta FedNow GDPinitial of provide for the quarter looking for growth at +10.4% annualized. According to the Atlanta Fed, “tThe initial estimate for first-quarter real GDP growth released by the U.S. Bureau of Economic Analysis on April 29 was 6.4%, –1.5% below the final GDPNow nowcast model released on April 28.The next update will be released on Monday, May 3 following the April US ISM Manufacturing Index and April US construction spending data.
For full American economy data forecast, display DailyFX Economic Calendar.
The positioning of futures contracts on the US dollar is neutralized (Chart 3)
Finally, looking at the positioning, according to the CFTC’s TOC for the week ended April 26 speculators slightly decreased their minor net long positions in the US dollar at 2746 contracts, against 3,518 contracts held the previous week. The positioning of the US dollar is closest to being exactly neutral for the first time since October 2020. Perhaps more interesting is the fact that the last time the futures market was at similar positioning levels, the index DXY was trading closer to 96.00 (closed in April at 91.30.).
— Written by Christopher Vecchio, CFA, Senior Currency Strategist