[Market Review].
The 10-year U.S. bond yield lifted above 1.7%. This week, the yield on the 10-year U.S. Treasury note continued to move higher, once rising above 1.75%, the highest level since last January. Bond traders increased their bets on accelerating economic growth and rising Inflation after Federal Reserve officials reiterated their forecast to keep interest rates near zero until the end of 2023 early Thursday morning. This will put upward pressure on long-term yields.
U.S. indices recovered lost ground. Yesterday, the U.S. dollar index came under sharp pressure from the Fed’s interest rate resolution, falling below the 91.5 handle. As U.S. bond yields moved higher and U.S. stocks moved lower, the dollar index regained previously lost ground.
Gold dipped again. While the dollar rallied, gold dipped again. Gold prices retreated from a high of $1750 to near $1730. On the U.S. side of the news, we also need to keep an eye on Biden‘s tax increase plan. Biden’s next spending bill would consider a massive tax increase, which would be the first major tax increase since 1993. While the future of the bill is still up for debate, it will have a significant impact on the market. Biden tax increase, the impact on gold is mainly reflected in the following two aspects: First, the capital gains tax increase, may hit the stock market, which in turn led to the stock market funds partially into the gold market hedge; on the other hand, the tax increase to make up for the gap in Biden’s base construction plan, so that the federal government does not need to borrow significantly, but also to reduce the size of the sale of Treasury bonds. And the reduction in the scale of the sale of treasury bonds, can make the treasury yields remain at a relatively low level, which is also beneficial to gold prices.
The euro returned to the 1.19 mark. Under the dollar rally again, non-US currencies are also hard to escape a drop. The euro gave back more than 60 points against the dollar overnight and is now back near 1.19. Although the EU drug regulator said the AstraZeneca vaccine is safe to use and the pair recovered some of its lost ground, the EU also stressed that there is still uncertainty about the vaccine. And many European countries have become cautious about the vaccine. Many European countries are now tightening their embargoes as the outbreak shows signs of resurgence in Europe. This is a blow to the head of the stick for Europe, whose economic recovery is growing more slowly than that of the United States.
The Bank of England kept interest rates unchanged. In addition to the sharp pressure on the euro, the pound also gave back some of its gains. The dollar rebounded, depressing the pound; and the Bank of England interest rate resolution announced last night, also formed a pressure on the pound. The Bank of England kept the key interest rate at 0.1% and kept the total size of asset purchases unchanged at 895 billion pounds, both in line with market expectations. After the interest rate resolution, the pound fell more than 20 points against the dollar in the short term.
U.S. oil plunged 9% overnight. In the oil market, in the past few days of muted trading, U.S. oil finally could not help but explode in silence, plunging 9% overnight, once falling below the $60 mark. There is a market view that the lower U.S. stocks overnight and the stronger dollar reflect market concerns about inflation, and this concern is also contagious to the commodities market. Meanwhile, the slowdown in vaccination in Europe hit Crude Oil even more from the demand side. As a general rule, commodities benefit from an inflationary environment. But it is worth noting that once inflation expectations are too high, especially when combined with concerns about economic growth and a stronger dollar, then inflation will instead become a drag on commodity prices in the face of weakening demand expectations.
In addition, some market participants said that recent tensions between the U.S. and Russia, considering the above events and the fact that the U.S. had previously threatened to impose restrictions on Russia, Russia may hit U.S. shale oil producers by dumping large amounts of crude oil.
Then there is the fact that Mexico’s president has said that during his term, Mexico will limit oil extraction to 2 million barrels per day, well above the recent requirement of 1.6 million barrels per day. As for Asia, the physical crude oil market is showing signs of weakness. This could also be the reason for the drop in oil prices.
The Canadian dollar has hit a snag and retreated. The Canadian dollar was blocked and retreated by the big drop in oil prices. The USD/CAD recovered its previous lost ground and returned to around 1.2490.
[Risk Warning
Gold: Gold fear of a sell-off down to $ 1500
Influenced by the Fed’s interest rate resolution, gold once broke through $1750. Nevertheless, Deutsche Bank believes that the continued high interest rates will make a sell-off in gold investment demand that has been substantially accumulated last year, and now almost a third has been sold off. However, the bank believes that physical demand in Asia, will provide support for gold around $1500.
Euro: poor economic forecasts Euro expected to be under pressure
Westpac believes that the euro may test the 1.17-1.22 range downward against the dollar. The rise in new coronavirus cases in many European countries has led to tightening restriction initiatives. The German Chancellor’s economic advisor lowered the German economic growth forecast for this year to 3.1%, from 3.7% in November. Economic growth expectations and vaccine distribution, both to the detriment of the euro.
Australian Dollar: Strong Employment Data Citi Bullish on AUD
Citi FX strategists remain optimistic about the outlook for the Australian dollar. Their view is further supported by the strong Australian employment data released on Thursday. These foreign exchange analysts also said that the Australian dollar will be supported if the market begins to anticipate in advance when the Australian Federal Reserve will raise interest rates. Australia’s employment rate, which has risen back above the March 2020 level, is close to the level before the Epidemic crisis. This makes the market begin to question how long the Australian Fed’s cautious monetary policy can be maintained.
[Key Forecast].
11:00 The Bank of Japan is expected to stay put
The Bank of Japan previously announced that a plan to evaluate policy tools such as listed traded fund purchases in March to enhance their sustainability. The epidemic has forced the central bank to maintain stimulus measures for a longer period of Time. The plan reflects growing concern among policymakers that the extension of easing measures is leading to higher costs.
Bank of Japan Governor Haruhiko Kuroda, for his part, said he would be wary of potential financial risks associated with ultra-easy policies, acknowledging growing concern among some policymakers that continued easing is fueling asset price bubbles. He also said that the yield curve needs to be kept low. This is not the time to discuss the BOJ’s expansion of the yield target range. The BOJ needs to have more discussions on the yield band. Making a decision on the yield target range is difficult. Higher bond yields will reduce the impact of monetary easing. It is not necessary for the BOJ to widen the target volatility range for long-term interest rates; the range is currently appropriate.
By the end of the week, Citi expects that the BOJ may maintain the long-term yield volatility range and consider operational adjustments to improve the flexibility of JGB purchases. That is, maintain the 0% target for the 10-year JGB yield by 20 basis points above or below. The market largely expects the BOJ to consider more flexible ETF purchases.
14:30 Kuroda Haruhiko may repeat the same old story
Later, Haruhiko Kuroda will speak. On Tuesday he said that the recent rise in global yields may reflect optimism about the economic recovery, but the epidemic remains the biggest risk to the economic outlook. There is no need to change the yield curve control (YCC) framework, and it is crucial to keep the entire yield curve low and stable. It is clear that the BOJ is not worried about higher bond yields. Based on this, we believe that Haruhiko Kuroda may reiterate that higher bond yields are an optimistic expectation of economic recovery and no change to the YCC framework is needed. Overall, his comments will have little impact on the yen. However, the yen has been oscillating at higher levels recently and remains a concern.
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