18.05.202110:51 Forex Analysis & Reviews: How long will the Fed ignore the growing inflation? Overview of USD, NZD, AUD

The US Treasury's report on foreign capital inflows into securities released last night showed a fundamental change in investor sentiment in March this year. In just a month, the inflow changed by 450 billion compared to March 2020, with the main share of the increase coming from T-bills (Treasury Bonds & Notes on the chart). Apparently, March was a key month in investor sentiment, since it was at that time that the Biden stimulus program for $ 2.1 trillion was adopted, and the futures market was experiencing a sharp reduction in the short position on the US dollar, which was repeatedly noted in the reviews.

However, the US dollar then began to sell off again, without forming a long position, since investors are concerned about the too rapid growth of the budget deficit and the cautious position of the Fed, which postponed the rate increase to 2023. Apparently, the March surge in US securities ended in April, and it is impossible to focus on these noticeably lagging data.

Now, the main question is how long will the Fed intend to ignore the rising inflation. While there is no new data, the most likely scenario is a drift in the already established direction, that is, an increase in demand for raw materials and commodity currencies against the favor of the US dollar and protective assets.

NZD/USD

The PSI index in the service sector reached the highest value since the beginning of research in 2007 and amounted to 61.2 p. The sharp increase in the index occurred in view of an almost complete absence of tourists, since restrictions on visiting the country have not yet been lifted, which indicates a high potential for consumer demand.

It is possible that this is a reaction to the cooling of the housing market growth after the measures taken at the beginning of the year aimed at preventing the expansion of the housing bubble.

This week's primary event is the publication of the budget for the 2021 fiscal year. In particular, the government's estimates of revenues and especially expenditures will be important. The national debt, if the measures taken earlier are not revised, will grow by about 120 billion by 2023, which is quite a lot for a small country, and the assessment of income and expenses may cause changes in the mood of investors.

According to the CFTC, the net long position slightly rose to 189 million over the reporting week. The preponderance of the bulls is essentially symbolic, but as for the yield of government bonds, this trend in New Zealand is clearly stronger than that of the US Treasury in the last couple of weeks. Thus, the trend should be considered bullish.

Previously, it was assumed that the NZD is targeting 0.7330/60 as the upper limit of the channel, but since there was a pullback to the lower limit, the target is slightly shifted higher. Most likely, the channel border will be located near the resistance zone of 0.7420/60, which will be the target next week.

AUD/USD

The minutes of the RBA meeting published this morning undoubtedly did not provide any new information. The bank's position was explained by RBA Deputy Governor Debelle in a recent interview. This position is maintained in the mode of balancing between the hawkish and dovish agenda, and it consists in the fact that decisions on policy changes will be made at the July meeting, and not before. Accordingly, the currency market did not react to the publication in any way, and the Australian dollar moves in accordance with external factors that are now positive for commodity currencies.

Nevertheless, we must closely monitor what is happening. The data on April employment and the May index of consumer inflation expectations will be released on Thursday. There are neutral forecasts with a slight preponderance of positives.

Based on the CFTC, the net long position of AUD slightly grew to 189 million over the reporting week. The estimated price is directed upwards, which gives reason to expect continued growth.

Like the New Zealand dollar, the Australian one pulled back to the lower border of the upward channel, but remained within its borders, which gives reason to expect the growth to resume. The upper border of the channel is in the zone of 0.7940/60, which will be the nearest target. After that, we expect the breakdown of the high at 0.8010 or either impulse development or consolidation before the strategic target of 0.8139.