XM does not provide services to residents of the United States of America.

Daily Market Comment – Yen and franc dive but stocks unable to sustain Powell bounce



  • Safe-havens yen and franc plunge again as Powell boosts recovery hopes
  • US stocks pull back from sharp dip but elevated yields continue to weigh
  • Pound catapults to fresh highs; aussie, kiwi and loonie soar too

Powell reassurance sends safe havens skidding

Growing optimism about a vaccine-led recovery continued to reverberate through currency markets on Wednesday, steering riskier pairs to fresh highs, while pummelling traditional safe havens such as the yen and Swiss franc. The latest wave of positive outburst comes on the back of soothing words by Fed chief Jerome Powell.

Speaking at his semi-annual Congressional testimony on Tuesday, Powell reiterated that the economy is “a long way from our employment and inflation goals”, adding that it will take “some time” to achieve substantial progress towards those goals.

However, whilst maintaining a dovish guidance, Powell did not appear to aggressively push back on the recent jump in long-dated Treasury yields, calling it “a statement of confidence on the part of markets” about the recovery.

His remarks underscored the view that easy money will keep flowing at least for the rest of this year even as the global vaccination campaign gathers pace and an end to the pandemic moves within sight. The improving recovery prospects combined with a pledge to keep monetary policy accommodative for as long as needed have sapped demand for safe havens, with the Japanese yen and Swiss franc being one of the biggest losers.

The yen was down by over 1% against the New Zealand dollar in European trade, while sterling was flirting with the 150-yen level. The US dollar also made strong gains, jumping to around 105.75 yen.

The franc slipped sharply against the euro to levels last seen in October 2019, breaching 1.10 per euro, and brushed 3-month lows versus the dollar.

A stock market crash or just a rotation?

Although the risk-on tone couldn’t be more evident in the FX sphere, it was a somewhat dampened mood in equity markets. The major indices in Asia plummeted by around 2%, spooked by yesterday’s incomplete rebound by the Nasdaq Composite and Nasdaq 100. Both the Dow Jones and S&P 500 managed to recoup losses after Powell’s remarks to close marginally higher but the Nasdaq’s slide was too great to be reversed on time.

The surge in Treasury and other major government bond yields has turned the spotlight on Wall Street’s excessive valuations, mainly in the tech sector. Expectations that the vaccine rollouts around the world will soon pave the way for closed-up sectors of the economy to re-open and that consumption will be boosted from another big stimulus package are shifting attention away from tech and stay-at-home companies to traditional and cyclical sectors such as industrials and consumer discretionaries.

But even without the pressure emanating from the spike in borrowing costs, it’s likely that tech stocks would have fallen somewhat out of favour as cyclicals were always going to be the main winners from the reopening phase.

US stock futures were back in positive territory after European markets opened higher, having started the day in the red.

Pound, kiwi soar again but dollar finds support in Treasuries

The US dollar also firmed slightly during the course of the day as Treasury yields started to creep higher again after yesterday’s small pullback. This eroded the pound’s earlier gains when it briefly hit the $1.42 level for the first time since April 2018. Cable was last trading up a more modest 0.3% at $1.4152.

The Australian dollar also eased off from its highs to stand slightly higher at $0.7914, but the kiwi held on to its hefty 0.6% gain as it eyed the $0.74 handle. A dovish policy statement by the Reserve Bank of New Zealand did little to deter the kiwi as investors were unconvinced by Governor Orr’s warning that the bank is prepared to take rates even lower.

The Canadian dollar was another one scaling fresh peaks as it climbed to a near 3-year high versus the greenback.

Looking ahead to the rest of the day, Powell will speak on his second day of hearing before lawmakers at 15:00 GMT, and Bank of England Governor Andrew Bailey will speak before UK parliamentarians at 14:30 GMT.

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.