Nordea Remain Fairly Upbeat On The Greenback

Nordea remain "fairly upbeat on the greenback: as i) the U.S. growth outlook remains stellar, ii) upside risks to U.S. inflation create upside risks for U.S. real rates as the Fed will continue to take baby steps towards tightening, iii) delta COVID fears are creating headwinds especially for EM countries while perhaps also iv) creating upside risks for the USD because of "uncertainty." Another potential USD positive is the overnight reverse repo facility (ON RRP). The facility's usage jumped from $841bn to $991bn ahead of the half-year turn. The 5bp hike to the facility has clearly incentivised further usage, not least around month- and quarter-turns. The net/net effect is that the de-facto USD liquidity (USD reserves - Treasury General Account - RRPs) is now FALLING! This is tapering or even stealth QT! The usage of the ON RRP facility effectively annuls the liquidity added via QE, the QE program has clearly become less effective, unless the Fed accepts negative money market yields, which is clearly an option that they prefer to opt out on! This generally makes an aggressive tapering process MORE likely than otherwise."