Trading Currencies: The Return of Janet Yellen

The return of the former Fed Chair Janet Yellen to the forefront of US policy; this time on the fiscal side it’s one that the FX market will probably meet with glee.

A solid communicator and an advocator for ‘strong’ policy accommodation, Janet Yellen’s upcoming appointment to Treasury Secretary will likely mean that Joe Biden’s fiscal stimulus package will be one of mammoth proportions – and a potential short-term negative for the USD.

To highlight this point, here are some extracts from her speech that she gave about her upcoming appointment.

“We lawmakers need to ‘act big’ on the next coronavirus relief package,” she complimented by adding that the benefits of the package will well and truly outweigh the costs of a higher debt burden.

“As Treasury chief my role will be to assist in the rebuilding of economy so that it creates more prosperity for more people and ensures that American workers can compete in an increasingly competitive global economy.”

“Right now, short term, I feel that we can afford what it takes to get the economy back on its feet, to get us through the pandemic.” As rates are historically low and that debt-servicing payments as a share of the economy are lower today than before the 2008 financial crisis.

These are big statements and the ones that support the trade we have seen throughout 2020. A tidal wave of USD is likely to hit the markets in the foreseeable future.

Future of the USD trend

Her comments also back what the Federal Reserve has stated – that it will back the economy with quantitative easing and record low rates until inflation averages 2% – something that is at least 2 years off. Having US fiscal and monetary policy aligned will create some form of inflation in the future that is the intended goal and that the rates will therefore rise.

Ms Yellen’s statement coupled with last week’s statements from Fed officials show that rates for the foreseeable future will remain incredibly low.

This was seen in the movement of US treasury with US 10-year yield falling from 1.12% to 1.09% on Yellen’s remarks and have continued to fall.

Time to go ‘risk-on’?

The flip side of this is the acceleration of the risk trade with textbook moves in CHF, JPY and USD easing while the like of EUR, GBP and AUD shifting higher.

EUR/USD is now back above $1.21 at $1.2145, the GBP/USD is back above $1.36 at $1.3630 while AUD/USD is now above $0.77.

Key Events to Watch in the Coming Week

• Fed’s Monetary Policy Statement – January 28, 2021 (GMT +11)
• USA’s Gross Domestic Product Annualized (Q4) – January 29, 2021 (GMT + 11)

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.