Market Overview

12 January 2021

Warm-Up of the Currency Market: Squats Only Help to Jump Higher?

The very beginning of 2021 has so far been marked more by political turbulence in Washington, including riot scenes at the Capitol Hill which was followed by congress’s efforts to impeach Donald J. Trump, just several days before his term expires. As a result, this period of is not so much remembered for any set of economic news that could be critical for the financial markets. Stocks on both sides of the pond were not particularly disturbed by these background events and even managed to once again update the multi-month highs for the pan-European Euro Stoxx 50 index and all-time historical highs for the German Xetra DAX index as well as for the triad of the major U.S. stock indexes, but it's already a cliché to say that.

Anyway, this also reduced demand for safe-haven assets, which was not high even without that, including gold and U.S. Dollar-denominated public bonds. At least the outward appearance of a smooth transit of power in Washington dropped gold spot prices this Monday to $1816 per troy ounce, which corresponded roughly to the lows of mid-December 2020. But the market's interest to invest in the precious metals at cheap levels is seen to be quickly returning, probably because of the increasingly diluted money supply, so that gold very quickly bounced above $1850, within several hours yesterday, and it seems to now be trying to recover more during Tuesday's trading session. Gold may also be seen as an important tool for the diversification of many stock portfolios in case they would be replenished instead of partially sold to take profit, as such an interdependence was observed for most of the past year.

However, even the rising coronavirus cases throughout the globe did not manage to stop the selloff process in U.S. Treasuries, which was extended as markets reckoned on big spending by the government after a "blue wave" covered both the Senate and the House. It seems that nothing can now stop Mr Joe Biden and the Democratic Congress leader Nancy Pelosi to adopt another urgent expenses program for at least $1 trillion or even more in addition to the already approved bipartisan $2.4 trillion. Direct payments to citizens of $2,000 per person instead of $600, which the Republican majority of the Senate, led by Mitch McConnell, refused to approve earlier, but which both Biden and Trump demanded, are now almost a settled matter. In addition, more expensive infrastructure projects like the allegedly $2 trillion "Green Deal" were previously announced as electioneering promises by Joe Biden’s team.

The first bottom of the demand for U.S. Treasuries was achieved near the end of last week when EUR/USD tested the vicinity of 1.2350 and AUD/USD climbed above 0.78 twice. A mirror-reflection echo of this was the yield on benchmark U.S. government 10-year debt, which always seem to rise when bond prices fall. So the yield originally gained as much as 2% to a fresh ten-month high of 1.1250% last Friday. Then, this more attractive yield prompted some additional demand to allow the U.S. Dollar to partially recover up to 1.2130 against the single European currency and to 0.7665 against the Aussie.

But this week, the sell-off of excessive U.S. Treasuries continued, bringing yields to 1.1630%. So far, this did not lead to new declines in the exchange rate of the U.S. currency on forex, and the Greenback may well take a small revenge, at least due to inertia and acceleration capability of any actual market movements. The U.S. Dollar index bounced 1.5% from last week's nearly three-year low as investors just trim a little of what have become very large short positions. But the overall trend for the weakening of the U.S. Dollar, which has been observed in the markets for several months in a row, is unlikely to be in doubt. The level of 1.20-1.25 may become the most likely technical corridor for the EUR/USD pair for the rest of January, and more than that, the uptrend has a real chance of accelerating sharply, if any dips just above or around 1.20 are bought out, then the uptrend may then have a real chance of accelerating. It's like warming-up in sports, good squats usually help to jump higher if higher jumps are wanted. 

As a means of justification for some present rebound for the Greenback, three regional Federal Reserve (Fed) presidents hinted more or less clearly on Monday that the "tapering" of bond purchases could theoretically begin, at some conditions, toward the end of 2021. Tom Barkin from Richmond's Fed, as well as Atlanta's Raphael Bostic and Dallas' Robert Kaplan, said some words that may be interpreted in this way. The Fed speeches cycle is going to continue on Tuesday evening.

But the Fed is currently pumping $120 billion into the financial system each month through such asset purchases, which is the so-called quantitative easing (QE) policy. And all the previous experience with QE under Democrats in 2009-2014 showed that it was a long-lasting measure, as the Fed was not eager to finish it for almost five years after the previous crisis. Same expectations are prevailing now, taking into account the statement of the Fed's Chairman Jerome Powell too in December, plus the Fed's economic projections with almost zero interest rates expectations at least until the end of 2023.

The interposing comments of some representatives of the Fed to sow the seeds of doubt may be an ordinary gas lighting trick for the U.S. Dollar weakness trend. Contradictory verbal interventions could easily be a part of a big plan to stretch out the U.S. Dollar devaluation for the financial authorities and the economy could gain from it for at least a couple of years or more. Nevertheless, the devaluation that is seen to be taking place at a step-by-step process is probably a necessary consequence of the "money printer" policy as the market community generally expects a big-spending, big-borrowing United States government.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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