US moves towards megastimulus

See the latest Australian dollar analysis here:

Macro Afternoon

Credit Agricole with the note:

The stronger than expected NFP report on Friday boosted the USD across the board as it seemingly helped the Fed move closer to QE taper and policy normalization. Indeed, the data likely alleviated some of the officials’ recent worries that a jobless recovery in the US could compromise their inability to meet their full employment objective. Looking ahead, focus this week will be on the Wednesday’s US CPI data release where we could get first indications that the price pressures are starting to come off the boil. That said, with the US inflation likely to remain at historically very elevated levels, the Fed should remain confident that they have met their inflation objective. Market speculations that the FOMC could pre-announce QE taper at the Jackson Hole symposium on August 26-28 could continue to support the USD in the near-term especially if they boost its rate and yield advantage. That being said, there are a couple of reasons that may warrant some caution on the USD outlook. The first is the fact that the Fed could decide to wait until the September policy meeting to announce its policy normalization plans. Indeed, recent USl labor market data has been so volatile that it could encourage the policy makers to wait for the August NFP print as well as the updated staff projections before making a decision QE taper. In addition, we further suspect that the market uncertainty about the US fiscal stimulus could remain a drag on the USD given that it could limit the upside of UST yields. We note in that that while there seems to be bipartisan support in the US Senate for the c.USD500bn infrastructure bill, this is not the case for the additional c.USD3.5tn package that the Democrats may have to pass through the US congress using the process of reconciliation. Moreover, the expiry of the US debt ceiling at the end of July may complicate matters in that the Democrats could insist on a bipartisan solution, which could delay any agreement on the fiscal stimulus. In the interim, the USTreasury will need to run down its cash holdings and reign in debt issuance, keeping a lid on UST yields.

Goldman has more detail:

The Senate Democratic budget resolution includes “reconciliation instructions” that would allow for an increase of up to $1.75 trillion/10 years, greater than our expectation of around $1 trillion in deficit expansion. These figures only set the upper bound for the eventual bill and might change before the Senate passes the resolution. That said, the details of the resolution suggest that the risks lie to the upside of our assumption of a spending boost of around $3 trillion/10 years, a change from several weeks ago when the risks appeared to be to the downside.

US growth, inflation and yield advantage in the making for the cycle. 

DXY bull market.

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