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Weekly FX Commentary May 12, 2021: Weakening USD amid inflation concerns

SystematicEdge May 12, 2021 Weekly FX Commentary

Weakening USD amid inflation concerns
This week saw US inflation break even rates – measures of investors’ inflation expectations calculated as the spread between the yield on nominal US government bonds and the yield on Treasury Inflation-Protected Securities (TIPS) – surge with the 5-year break even rate closing at 2.717% on Monday, a new high since 2008.   In addition, April employment figures in the US came in weaker than expected last Friday with 266k nonfarm jobs added (vs consensus: 978k; previous: 770k) and the unemployment rate at 6.1% (vs consensus: 5.8%; previous: 6.0%). This strengthened the prospects of having the Fed keep rates low despite rising inflation, thus increasing the downside pressure on both US real yields and the US dollar.   Unsurprisingly, the US dollar weakened against all major currencies over the past 7 days, in line with its long-term bearish trend (read why we see a long-term downtrend for the US dollar in our latest quarterly FX commentary).   Meanwhile, commodity-linked currencies like the Canadian dollar and the Australian dollar continue to appreciate amid the global economic recovery (CAD: +1.4% vs USD in one week; AUD: +1.3%).

US core inflation for April (consensus: 2.3% YoY; vs previous: 1.6%) and US headline inflation for April (consensus: 3.6% YoY; vs previous: 2.6%) will be announced later today. Higher-than-expected figures would likely push the US dollar further down.