US Open Note – Dollar knocks down riskier currencies; House stimulus vote looming

Christina Parthenidou, XM Investment Research Desk

Central banks react after yield rally

It was a turbulent week for markets as the rapid rise in global bond yields triggered profit taking on stocks and harmed traditional safe-haven currencies, with the S&P 500 and Nasdaq set to close the week with considerable losses, though hold within the neutral-positive territory in monthly terms.

Although investors got assurances from the Fed and other central banks that any tightening in monetary policy was long in the future, the yield rally over the past couple of days has been alarming enough to raise concerns in the RBA, which decided to buy A$3 billion of debt to contain the surge. Isabel Schnabel, who is responsible for the ECB’s market operation, also appeared a bit bothered on Friday, saying that “policy will have to step up its level of support”, while the Bank of Japan, which does a yield curve control policy at a larger degree than the RBA, sent similarly cautious vibes. Apparently, central banks may have a tough time to keep their policy ultra-accommodative if the sell-off in bond markets continues at a high speed, therefore it would be interesting to see if the Fed pivots its stance in this case.

US core PCE ticks above epxectations; bond yields below Thursday’s highs 

Also, a significant upside surprise in inflation measures in the coming months could simply increase the number of front-running investors, who believe into an earlier tightening, likely adding more fuel to the reflation trade. That said, the US core PCE inflation index, which came in at 1.5% y/y in January versus 1.4% expected did not prompt any immediate reaction today. The slight upside surprise in personal income and consumption figures was also shrugged off.

The 10-year US treasury held around 1.47% after the release, while futures tracking the S&P 500 and Nasdaq 100 were showing a soft recovery after Thursday’s plunge. In Europe, the pan-European STOXX 600 and the German DAX 30 were following their Asian counterparts into red territory, though with a smaller losses as European bond yields remained below recent highs.

Dollar roars back, aussie loses weekly gains

In the FX world, the US dollar roared back, causing severe injuries to the antipodean currencies, which were more than 1.0% down on the day after an impressive bullish performance earlier in the week. Aussie/dollar flipped its weekly gains and was set to close negative near its 20-day simple moving average (SMA), while kiwi/dollar was more resilient, eyeing a neutral finish to the week despite its aggressive pullback.

Dollar/yen eased its positive momentum after touching a four-month high of 106.51.

The European currencies were also knocked down, but less harshly. Euro/dollar could not sustain its strength above 1.2150, but the 20-day SMA came to the rescue around 1.2000. The meltdown in the pound was enough for pound/dollar to print its first red weekly candle after seven weeks and euro/pound to climb above the 0.8700 mark and closer to its 20-day SMA.

Commodities on the back foot

In commodities, WTI crude oil lost more than 2.0% on the back of the dollar strength, while gold printed a new lower low at $1,755.

Biden’s stimulus plan heads to the House

In the rest of the day, the spotlight will fall on the House of Representatives, where Democrats will try to pass Biden’s crucial stimulus plan. An increase in the minimum wage to $15 remains a sticking point, though with the extended unemployment benefits set to expire in two weeks, and a positive vote in the Senate looking like a tougher job, Democrats could exclude the wage floor provision from the bill. Note that the wage floor provision would not allow Biden to use a budget reconciliation process since this would require 60 votes in the evenly-split Senate.