The weakness of the US dollar is the main topic of today's session in the markets.
Without a doubt, the weakening of the USD has to do with the belief that, one way or another, the US fiscal stimulus package will be approved. The deadline imposed by Nancy Pelosi has not been respected and the talks are continuing.
These positions seem to be closer as the meetings between the representatives of both parties take place. The amount with which the stimulus package is endowed, which is the main element of contention is approaching every moment.
Latest news is that Republicans propose 1.8 trillion against the 2.2 trillion approved by Democrats in Congress. Although it is unlikely that a compromise in this regard will be reached before the electoral date, the market begins to assume that a figure around 2 trillion dollars will be approved in the near future, as the electoral polls predict the Democrats might manage to win the elections.
With this uncertainty, investors have begun exiting long US Bonds positions, a movement that is reflected in the falls of Tnote10 to an important support zone located around a support band between 138.20-138.40, below the SMA 100 days, pointing to greater losses until the SMA 200 days that is now passing by 137.50. In terms of yield, the bond has surpassed the 0.80% level for the first time since last June.
This market movement is a faithful reflection of a better risk appetite of investors, which is caused by the proximity of a monetary injection of enormous amount – such as the one that will be implemented in the United States in the near future.
Now, this better market sentiment is not being felt with much force in the stock markets which although are experiencing gains, they are of small significance. Keep in mind that we are in the earnings season and therefore investors are waiting to know results before making decisions. In any case, and if there are no major surprises in terms of corporate results, the announcement of the implementation of the fiscal stimulus package will push the main indices higher.
As I pointed out at the beginning, another movement that reflects this improvement in risk sentiment is the fall of the US dollar. The North American currency that acts as a safe haven in times of uncertainty is being sold across the board and with special significance in the case of USD /JPY.
Normally there is a direct correlation between the yields of the American treasuries and the price of this pair. However, on this occasion although yields have rebounded strongly, USD/JPY has fallen to the lowest levels in recent months, approaching the support area of 104.20.
This could act as evidence that both the Fed's expansive monetary policy with the lowest interest rates in the history of the dollar, and an aggressive fiscal policy that will inject huge amounts of money into the market, are both elements that push the US currency down, and with a high degree of probability it might continue to push lower in the future.
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