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USD: How Surging Treasury Yields Affects Powell’s Testimony

By Kathy LienForexFeb 22, 2021 02:36PM ET
www.investing.com/analysis/usd-how-surging-treasury-yields-affects-powells-testimony-200562453
USD: How Surging Treasury Yields Affects Powell’s Testimony
By Kathy Lien   |  Feb 22, 2021 02:36PM ET
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  • Fed Chair Powell Delivers Semi-Annual Testimony On Economy Tuesday
  • EUR Rises On Stronger German Business Confidence
  • GBP Hits Fresh Highs But UK Labor Data A Risk
  • NZD Soars After S&P Upgrades Sovereign Rating
  • CAD Climbs to 3-Year High

Federal Reserve Chairman Jerome Powell’s semi-annual testimony on the economy and monetary policy is one of the most important events this week. The broad-based decline in the U.S. dollar is a sign that investors expect cautious comments. Approximately 1.7 million coronavirus shots are being administered every day and with 13% of the population receiving a first dose, the U.S. is charging ahead with vaccine rollout. There have been setbacks with many states, including New York, struggling with supply issues, but a lot of that had to do with poor weather that delayed the delivery of about 6 million doses this past week. Supply will be less concerning in the coming weeks as manufacturing ramps up and the Food and Drug Administration approves Johnson & Johnson’s single dose vaccine.

All of this is important because it reinforces the possibility of a strong U.S. economic recovery. However, even if the outlook is bright, there’s very little reason for the central bank to shift course, especially with the recent surge in Treasury yields. Rising rates and the steepening yield curve are two of the biggest stories that emerged in the financial markets this year. Since Jan. 1, 10-year rates rose from 0.91% to 1.39%. This double-digit increase is fuelled by a ramp up in inflation expectations and concerns about central bank action.

So the question now is: How does this impact Powell’s testimony? 

It gives the central bank head more flexibility to keep monetary policy accommodative because the rise in Treasury yields tightens financial conditions by driving up mortgage and credit card rates. Powell has made it very clear during his speech to the Economic Club of New York two weeks ago that he thinks the increase in inflation is temporary and, even if prices rise in the coming months, “it isn’t going to mean much.” He also advocated keeping interest rates at the current near-zero level until the economy reaches maximum employment and inflation hits 2% to ensure a durable recovery. Since then, data has been mixed, with retail sales recovering but job growth falling short of expectations and jobless claims back at their highest level in a month.

With all of this in mind, we expect Powell to downplay the increase in prices and reiterate that accommodative monetary policy is needed for the foreseeable future. Any talk of taper is premature. Dovish comments like this should extend the slide in the dollar, taking USD/JPY towards 104.50 and AUD/USD to 80 cents.

Stronger-than-expected German business confidence drove the euro higher against the U.S. dollar for the third day in a row. However, compared with other currencies, the euro’s gains were more modest because investors are worried about the central bank’s sensitivity to the strong currency. The European Central Bank didn’t mention exchange rates today but it said it is watching the rise in yields closely. Compared to U.S. and UK, vaccine rollout in the Eurozone has been painstakingly slow. Germany, the largest economy in the EZ, has vaccinated only 4% of its population. The vaccination rate in France, Spain and Italy are slightly lower. We have argued that this lag will lead to the euro underperforming other major currencies, which is exactly what we’ve seen today.

Sterling climbed to fresh multi-year highs against the U.S. dollar and closed in on fresh one-year highs versus the euro. Investors cheered Prime Minister Boris Johnson’s plan to ease restrictions across England. With more than a quarter of its population receiving at least one coronavirus vaccine dose, new cases in the UK have fallen from a high of 68,000 in January to 9,800 on Sunday. Schools will reopen on March 8 followed by outdoor gatherings March 29. There will be a five-week gap between each stage, which means restaurants, retail shops and pubs may not open until spring. UK labor market numbers are scheduled for release tomorrow and if claimant count increases, like the PMIs suggest, we could finally see a pullback in sterling.

The Australian and New Zealand dollars continue to be the best performing currencies. Standard & Poor's upgraded New Zealand’s credit rating to AA+ from AA, sending the currency to 34-month highs versus U.S. dollar. S&P said:

“New Zealand is recovering quicker than most advanced economies because the country has been able to contain the spread of COVID-19 better than most others.”

This strength extended to the Australian dollar, as the country shares the same promising outlook as NZD. The Reserve Bank of New Zealand meets this week, and less dovishness is expected from the central bank. USD/CAD fell to fresh three-year lows, but on a percentage basis, its gains were modest because weaker data is offset by stronger oil prices. Canada is also trailing the world in vaccination, with only 3.8% of its population receiving their first dose. Supply is a big problem because they invested in European factories in fear of U.S. export bans. These factories are struggling to keep up with demand, and recently the EU said it will be introducing export controls on vaccines made in the bloc, which could delay vaccine delivery further.

USD: How Surging Treasury Yields Affects Powell’s Testimony
 

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USD: How Surging Treasury Yields Affects Powell’s Testimony

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Comments (9)
cricket reports
cricket reports Feb 26, 2021 9:01PM ET
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gread
Joycelynn Nelson
Joycelynn Nelson Feb 23, 2021 3:23AM ET
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Great read!
Ednalyn Biyo
Ednalyn Biyo Feb 22, 2021 11:28PM ET
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how to start in here I'm newbie here
Chukwuebuka Okwesili
Chukwuebuka Okwesili Feb 22, 2021 11:28PM ET
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Just the way you've started. Read, make deductions and apply!
JR Pierce
JR Pierce Feb 22, 2021 10:02PM ET
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The dollar has not heard the news that it has a terminal disease called democrats aka commies, their plan for destroying the USA is progressing right on cue.
Silver Bull
Silver Bull Feb 22, 2021 10:02PM ET
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Democrats and republicans are the same. End the fed and abolish the cia.
Dave Jones
Dave Jones Feb 22, 2021 9:48PM ET
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The Fed balance sheet will become the US national debt...it already moves in lockstep. We're heading for an unavoidable default.
Dave Jones
Dave Jones Feb 22, 2021 9:46PM ET
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I think the point is another massive dose of stimulus is going to destroy the bond market. It's supply and demand. Nobody will buy leaving the Fed as bolr on the hook for it and hence the US taxpayers. This will not end well.
Silver Bull
Silver Bull Feb 22, 2021 9:46PM ET
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Its all planned and going exactly according to plan. These criminals have organized this entire crisis and deserve to be hanged.
Pradeep Jhanjee
BlauGloriole Feb 22, 2021 9:43PM ET
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With debt multipliers, especially given the intended expenditures, approx zero to negative best of luck with long term inflation. Labor participation is at 61.4%! Reaction to Covid was and is a self inflicted massive wealth destroyer. Bond yields are already at levels before Covid and growth was dismal for years before. Zombie companies will soon start collapsing at these rate levels. Euphoric short term rise in yields is an opportunity to let duration work for you. Yellen will be yelling to bring down the back end soon. Happy hunting...
peter neal
peter neal Feb 22, 2021 6:54PM ET
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They will have to stop easing sooner then expected. Too much money pumped into people's pockets. All consumer goods sold out like bikes etc. People speculating into Bitcoin with extra cash. Economy is hot 🔥
James Pattison
James Pattison Feb 22, 2021 6:54PM ET
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Its hard to say the economy is fire when 800,000 new jobles claims were filed... the investment market is hot... and that helps make rich people richer...
Evan Ault
Evan Ault Feb 22, 2021 6:54PM ET
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yeah? who's gonna get in front of a camera and tell that to the 4.5 million Americans collecting unemployment benefits with no job to return right now?
Mdminhaz Ahmed
Mdminhaz Ahmed Feb 22, 2021 6:19PM ET
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how do process
 
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