- 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 haven 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 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 to close marginally higher but the Nasdaq’s slide was too great to be reversed on time after Powell’s remarks.
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 of the economy.
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 highs 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.
