When it comes to addressing USD inflation and futures marketing, timing is everything. Inflationary cycles can arise quickly, wreaking havoc on sectoral or aggregate economic conditions. However, given the proper perspective, astute futures traders can mitigate inflation’s downside while taking advantage of the upside.
What Is Inflation?
Inflation is a periodic increase in the prices of goods and services. If the prices of food, clothing, housing, and other staples rise disproportionately with incomes, undue pressure may be placed on consumers. Unless you’re in an industry that benefits from an inflationary cycle, the negative impacts can be severe.
Prices of goods and services can rise for many reasons. A few of the most common factors are increased demand, higher production costs, and expansive fiscal policy by governments or central banks.
Inflation is primarily measured in two ways: the Consumer Price Index (CPI) and the Producer Price Index (PPI). Each metric quantifies the price changes of a specific basket of goods and services local to either consumption or production. When it comes to USD inflation and futures marketing, active traders and investors frequently take both CPI and PPI into account.
Lagging to Robust Inflation
Typically, the monetary policy established by a country’s central bank is the mechanism by which inflation is managed. In America, the U.S. Federal Reserve (Fed) is commissioned to craft policy that promotes maximum employment, pricing stability, and sustainable economic growth.
To accomplish these objectives, the Fed pursues a long-term 2 percent inflationary objective. At 2 percent, wages and prices are thought to move upward in tandem, promoting stable economic growth. Since 2011, annual average inflation has either lagged behind or modestly outperformed the Fed’s 2 percent benchmark.
Historically, high rates of inflation have been observed in nations experiencing trying economic times. A few examples include late-18th-century America, pre-WWII Germany, and the Argentine Crisis of 2001. Each of these periods of inflation occurred under extraordinary circumstances, and many analysts believe that the 2020 novel coronavirus (COVID-19) pandemic may produce another significant inflationary cycle.
Will COVID-19 Lead to Mass USD Inflation?
Increased government spending and accommodative monetary policy have been common denominators in many historic inflationary cycles. Analysts view the COVID-19 pandemic as a catalyst for each in the United States:
- Government stimulus: In response to the COVID-19 pandemic, the U.S. government launched the CARES Act. Under CARES, more than $2 trillion in assistance to workers, businesses, individuals, and industry was distributed. This act was the first of its kind, to be followed by additional government programs.
- Fed quantitative easing (QE): During the height of market volatility, the Fed launched a policy of unlimited QE. According to unlimited QE, completely open Fed purchases of U.S. Treasuries, corporate debt, and other assets were authorized. Shortly after launch, the Fed’s balance sheet eclipsed US$5 trillion for the first time ever.
For investors who closely monitor USD inflation and futures marketing, 2021 is going to be a fascinating year. To fight the COVID-19 economic fallout, the U.S. government and the Fed adopted aggressively expansive policies―will 2021 be the year inflation becomes a leading market driver?
According to the CME FedWatch Index, the answer is a definite “maybe.” At the time of this writing, the CME FedWatch assigned a 100 percent probability to the Fed holding interest rates at 0.0-0.25 percent until at least March 2021. Between these interest rates, two or three separate trillion-dollar-plus U.S. government stimulus packages, and the extension of unlimited QE, the supply of USDs will increase at an unprecedented 12-month rate.
If inflation does spike, fund managers and institutional investors are likely to focus on preserving wealth from peril. On the other hand, active futures traders will go to work with a few of these tried-and-true inflationary strategies:
- Buy commodities: Commodities such as gold, crude oil, and agricultural products are traditional hedges against inflation. By buying deferred-month futures contracts facing these assets, traders may be able to capitalize on rising prices.
- Short the USD: By shorting the USD, futures traders may be able to profit on the slumping value of the greenback. There are several ways to accomplish this feat, including selling USD Index futures or buying foreign currency futures such as the Euro FX or Japanese yen FX.
Understanding USD Inflation and Futures Marketing Is No Easy Task!
At the very least, USD inflation and futures marketing is a complicated subject. Subsequently, grasping concepts such as Fed policy and advanced economics takes time and effort. Fortunately for active traders, staying current on inflation is as easy as subscribing to Daniels Trading’s online futures blog. Featuring timely insights and analysis, the Daniels Trading futures blog is a valuable asset for any active trader.
