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US Dollar Rallying as Gold Pukes; Here Comes the Fed – The Macro Setup

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THE MACRO SETUP OVERVIEW:

  • US Treasury yields rally sharply – more upside ahead?
  • Gold’s downside comes alongside another big move higher in Bitcoin
  • Rising Fed rate hike odds, shape of US yield curve prove supportive of US Dollar

TRANSITORY? OR TIME TO TAPER?

In this week’s edition of The Macro Setup, featuring Dan Nathan and Guy Adami, we discussed the impact of rising US Treasury yields across various assets classes, including gold, cryptocurrency, and stocks.

US corporate earnings have been robust – 88% of companies have reported, with 87% beating both their earnings estimates and revenue estimates – and both the Nasdaq 100 and S&P 500 have stretched to record highs. Concerns around the delta variant may be holding back the small-cap heavy Russell 2000, however.

While rising US Treasury yields make stock indexes less appealing at the margins, there are a few groups that are faring well: banks, industrials, and utilities. Now in the middle portion of year two of a bull market – which typically produces the most difficult trading environment for equities – it’s possible that we see more distribution and chop as asset allocation churns through 3Q’21.

Sticking with US Treasury yields, the movement in the wake of the July US nonfarm payrolls report has also produced an upside move in Fed rate hike expectations. Last week, there were 65-bps discounted through the end of 2023; now, there are 95-bps priced-in. Rising Fed rate hike odds coupled with delta variant concerns have seemingly hit ‘growth’ assets; commodities continue to struggle, particularly oil prices over the past week.

The biggest beneficiary from all of this has been the US Dollar. Historically speaking, the combined impact of rising US Treasury yields alongside elevated Fed rate hike odds has produced a more favorable trading environment for the US Dollar – as has the evolving shape of the US yield curve, which is mirroring its evolution during the 2013/2014 ‘Taper Tantrum.’

Finally, last week we asked, “if gold prices can’t rally in this environment, what will it take to light a fire under bullion?” Gold’s sharp turn lower is not a surprise considering that it failed to capitalize during a period of significant tailwinds. Duly noted, there is a case to be made that Bitcoin is taking incremental dollars from gold as cryptocurrency becomes a more widely-accepted asset class.

*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, among others, please watch the video embedded at the top of this article.

CHARTS OF THE WEEK

GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 TO AUGUST 2021) (CHART 1)

US Dollar Rallying as Gold Pukes; Here Comes the Fed – The Macro Setup

DXY INDEX PRICE TECHNICAL ANALYSIS: DAILY CHART (SEPTEMBER 2020 TO AUGUST 2021) (CHART 2)

US Dollar Rallying as Gold Pukes; Here Comes the Fed – The Macro Setup

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 TO AUGUST 2021) (CHART 3)

US Dollar Rallying as Gold Pukes; Here Comes the Fed – The Macro Setup

— Written by Christopher Vecchio, CFA, Senior Strategist