Market Overview

15 February 2021

The Yen and the Dollar Are the Main Losers in the Metal Ox Market

The U.S. stock market is closed this Monday because of Presidents' Day, while the whole of China celebrates its Lunar New Year vacations. By the way, the Year of the Metal Ox or Bull begun on February 12. The Chinese hieroglyphic symbol 牛 is attributed to the very same Bull, and it is pronounced similar to "niu" in English transliteration, which in turn sounds similar to "new". Even the intonation of the sound is phonetically similar to the ascending tone of the word "new" in the "new year" combination. In this regard, there is a curious associative question, which is whether this New Lunar Year will be just a "new" one, or will it be another "niu" bullish year for global markets?

As an appetizer, on the first working day of the "niu" year of the Metal Ox, the Japanese benchmark Nikkei 225 index cleared the psychologically important 30,000 points hurdle for the first time since August 1990. The major European indexes are also trading higher compared to the already perfect gains of the previous week, and the U.K.'s FTSE stock index climbed even 1.45% before noon.

It is noteworthy to consider that the influence of national stock indices' dynamics on national currencies is quite different in the case of European countries and Japan, which has already been mentioned. Historically, since the 90s, the Japanese Yen has been much more commonly used as a funding currency, as many banks took out loans with almost zero interest percentage in the Japanese currency in order to convert the currency into Dollars and Euros and then to invest it in the Western stock markets. This was possible as the Bank of Japan was the first financial regulator in the world, which invented the zero rate monetary policy. The tradition of those Yen credit lines is so strong that the Japanese currency usually tends to become cheaper in price at times of strong growth of Japanese national stocks, as even more Yen loans are sent to America or Europe to participate in the proposed future round of even better growth in the Western markets.

The paradox is that although interest rates for the Dollar have long been close to zero, and they are even negative for the Euro, but neither the U.S. nor the European currency has become a true funding currency with which to borrow money for investing in other continents to the same extent as with the Japanese Yen. As a result, the Japanese Yen continues to weaken sharply against the Euro, with EUR/JPY at fresh highs since December 2018 near 128, while USD/JPY is struggling to rise for the third day in a row above 105 even against the general anti-dollar tendency, which has clearly resumed in other currency pairs.

At the same time, the single European currency was priced around 1.2150 against 1.1950 just ten days ago, and it seems to be maintaining the mood for further growth. Despite the troubles of slow economic recovery and Brexit-related uncertainty, the British Pound is trading this morning at just 100 basis points distance from the nearest target of 1.40, where it was seen for the last time in the spring of 2018. The South African Rand has returned to pre-pandemic levels, and the Turkish Lira has recouped all the losses of the second half of 2020.

"The [January] rebound in the dollar ... was initiated by a relative U.S. economic outperformance, or expectations thereof," said Shinichiro Kadota, senior currency strategist at Barclays Capital in Tokyo. "Now the market is looking for actual evidence that the U.S. economy is outperforming. The [U.S.] economic data needs to improve," he added. The hopes of the majority of the investment community that a U.S. economic recovery would outpace other major economies, retreated to some extent amid disappointing employment data published on February 5, and it probably became a turning point for the tendency on Forex.

The U.S. economy still could outperform its rivals including Europe but this assumption now needs more evidence from macroeconomic data. But the U.S. recovery may also be the driver for the global economy to lift risky assets at the Dollar's expense. "The U.S. outperformance story ... has a lot further to run thanks to fiscal stimulus and faster vaccine deployment... But ongoing aggressive U.S. reflationary fiscal and monetary policy settings will leave DXY [the Dollar Index to the basket of major currencies] on a sustained medium-term bear trend," Westpac strategists wrote in a client note.

The new heights for the S&P500 broad market index in the United States seem only to reduce the need for the Dollar as a currency to shelter or for safe-haven purposes. But the S&P500 futures, even with the U.S. market closed today, rose again to a new historical peak above 3,950 points synchronically with the Japanese Nikkei 225 and also with a new jump in Brent oil prices above $63.5 per barrel. The pretext was that the Saudi-led coalition fighting in Yemen said late on Sunday it intercepted and destroyed an explosive-laden drone fired by the Iran-aligned Houthi group toward the kingdom, the Saudi state TV reported, creating fears of possible Middle East tensions.

In the middle term, commodities are supported by easing of lockdowns and also by growing hopes for the $1.9 trillion stimulus program to be adopted soon by the U.S. Democratic-led Congress. A stimulus program could mean that the Federal Reserve’s "money printer" could work again in order to print more money to finance the program, which may further devalue the U.S. national currency. The cheaper U.S. Dollar, as the unit of measurement for most commodity contracts, is also a factor in favour of more expensive oil. That, in turn, additionally pulls up the global indexes, which in turn... helps the Dollar to decline.

The circle has been lapsed, but it won't necessarily be eternal. Any weak link in this mechanism may be able to spoil the inertia of the "rotative" movement. Take a simple case: oil prices rose more than 13% since the beginning of February, so some new spikes on political news are not ruled out, but a higher oil price could be unstable. But there could be still periodic changes in the yield in treasury bonds, or some profit-taking and, therefore, corrective risks at any point of the strong movement. So, trend is usually a friend, but a solid portion of vigilance has never been seen to bothered anyone.


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

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