FX Trading focus:
US yields spike on stimulus check anticipation, supporting the USD
Markets somehow managed to avoid reacting to the unprecedented images of a mob of Trump supporters storming Capitol Hill and preferred instead to ponder the implications of the Blue Wave Lite scenario I discussed yesterday unfolding as to two Georgia Senate seats are set to fall to the Democrats, some of whom have already taken to promising the larger $2,000 stimulus checks soon after the new Congress is in session. To be fair, the immediate implications of the stimulus checks and Democratic control, however slim, of Congress is far more important than mob insurrections, even if the spectacle yesterday on Capitol Hill is a watershed event that crystallizes the political and societal dysfunction in the US more powerfully than any other moment in recent years save for the victory of Donald J. Trump in the first place. The reaction to this event could set in motion a number of tit-for-tat developments in US Congress and in the wider population that could lead anywhere. I’ll stop there.
I also discussed yesterday that at some level, a break higher in US yields (which was already unfolding as the two Senate run-off races in Georgia were seen likely to go to Democrats) could at some point provide some pushback against further USD weakening. However, I wasn’t necessarily expecting that pushback to materialize within hours. So, it just shows that the focus on this US yield breakout is tremendous and has enormous implications if it continues at anything approaching the current pace. If it were to do so, the 30-year US T-bond yield will soon be above the pre-Covid range low (200 basis points versus near 182 bps this morning) even if the 10-year has some ways to go before breaking similar levels up at 1.50% vs. near 105 bps now. The market narrative for equity valuations starts breaking down at some point higher and could as well for the USD bears unless the rise in US overwhelms any rise in yields – keeping US real rates firmly negative – that is the critical question.
In the FOMC minutes, the discussion was quite positive on the outlook for the economy and its performance even during the pandemic, and that discussion took place back in mid-December, before it was known that the $900 billion stimulus bill was going to pass and certainly before the Georgia Senate races were decided and the stimulus check anticipation was in the pipeline. Curious to see the mention of a taper once in the minutes and recently by. Is the Fed sensing the risk of having committed a policy mistake and buying insurance to temper financial stability risks from excessive froth in pockets of the equity market? Stay tuned – plenty of Fed speakers up later today for starters.
Also note that we saw a negative ADP payrolls print yesterday ahead of tomorrow’s US non-farm payrolls change numbers and that the ISM Services Index may have slowed a bit on the resurgence of Covid-19 in the US, even if markets continue to look beyond vaccinations, etc.
No surprise to see that USDJPY has backed up the most as the JPY has historically been very sensitive to US yield developments. There is no immediate technical implication of this move as it is very much in fitting with the three steps down, two steps up churning bear trend this pair has been in for months, but the US yield move has altered the playing field here for JPY traders, so the top of the descending USDJPY channel bears watching for something disruptive if US yield continue to press higher. USDJPY sellers will feel more comfortable if this US yield move fizzles quickly and goes sideways or even back lower as they try to take the pair to 100 or beyond to the downside.
Head of FX Strategy