As we look forward towards next week, its obvious that the narrative on Wall Street and beyond is about inflation. The global reopening trade has people arguing back and forth about whether the inflation is ‘transitory’ or ‘sticky.’ As traders, it is far too easy to get sucked into the debate, essentially clouding your judgement.
This is a common theme, especially if you aren’t that experienced, or worse yet – have had a rough streak as of late. Because of this, there are times when you simply need to pay attention to what is, not what ‘should be.’ I cannot stress this enough, and I think this week will be one of those times. As fundamental analysis goes – we are all over the place.
I could make an argument for longer-lasting inflation because of wage increases alone. I mean, how do you think it will play out if 6 months from now an employer cuts wages by $5/hr. and says, “You remember when you were hired? Well those times are over.” Having said that, there is also a big argument to be made for prices rising so much that people stop buying things. That is the ultimate source of deflation. So with this in mind, I am going to make a special effort this coming week to ignore what I think, and pay attention to where money is going. Sometimes, you have to admit you aren’t smart enough to predict the future.
Just below, you see two charts. On the left, there is the 10 year yield in the US. On the right, the US Dollar Index. Note the correlation. I suspect if we add a few basis points to the ten year, the US dollar will take off. In fact, we saw the Aussie, Euro, and Pound all look threatened at the close on Friday. However, its this 10 year yield chart you will need to watch. If it does not break out meaningfully above 1.3%, then the EUR/USD, GBP/USD, and AUD/USD pairs might have a chance to recover.
REMEMBER: Trade what you see, not what you think.