Ahead of the Presidential inauguration in the US, the general market mood remains upbeat. Investors and traders look forward to more hawkish statements from Biden to accelerate the upside moves.
The market maintains a positive outlook albeit slowly and cautiously as it looks for more clues from the about-to-be-official President Biden. After shedding some profit during Yellen’s Congress confirmation hearings on Tuesday, the Asian session on Wednesday once again started quick surges across the board. However, there has been another minor decline across risk assets. Overall, stock indices in the US, Europe and Asia remain positive despite the cautious approach that followed hours after the London market opened.
Less than three hours into the London session, the dollar index jumped 0.2% to hit above 90.4. EURUSD shed some profit together with the high-beta currencies. However, Pound Sterling jumped across the board thus completing over 180 pips bullish move for the GBPUSD so far this week. JPY and CHF remain weak. Meanwhile, commodities are having a good ride to the top. Gold and Silver maintain an upward trajectory together with oil prices. Cryptos bearish phase continues. Bitcoin dropped below $35,000.
US Politics and economic outlook
The political and economic affairs of the United States remain one of the major global risk barometers – if not the most important. Meanwhile, since Covid, the general market sentiment has taken a new shape. The US and other major economies have weakened their currencies, through unlimited fiscal and monetary easing, to support local businesses and therefore boost their equities. The USD, often used as a safe-haven and a global currency reserve (the most demanded foreign currency), has been the most affected. The response has been very positive for the stock markets and negative for the dollar. In recent weeks and months, different central banks have shown no signs of policy tightening despite the roll-out of vaccines to combat the virus. In fact, another $1.9 trillion relief package has been approved by Biden. Therefore, the general market sentiment into the first quarter of 2021 leans toward stronger equities and a weaker dollar.
Yellen eases talks on tax hike
In her confirmation hearings as the coordinator of the Biden’s economic team, before the US Congress on Tuesday, Janet Yellen explained the need for more easing. The former Fed Chair also played down tax hike during the pandemic. These two added fire to the bullish market sentiment. However, the US-China risk surfaced. She maintained a confrontational approach to China’s unfair competitive advantage to dominate key sectors of the global business and politics. Together with the inauguration uncertainties, a possible future US-China economic war has slowed down the market’s positive mood and is something traders and investors might have to worry about post-inauguration.
Biden’s Inauguration- speech & drama
The world was shocked when protesters invaded the Capitol building earlier in January. A similar scenario is a major concern on Wednesday. Protests, riots and attacks before, during and after the change of power exercise could weigh on risk. Also, President-elect Biden’s speeches will be analyzed. It’s clear that the market is waiting patiently for a big trigger.
Central Banks
Bank of Canada Monetary Policy
Bank of Canada is expected to leave its overnight rate unchanged at the record low 0.25%. At their meeting in December, the bank’s monetary policy committee maintained that it would keep the record low rate until it’s able to meet up with its inflation objectives. The Canadian inflation stands at 1% (from 0.7%) against its 1-3% target range. The stable and rising oil prices together with global vaccines being rolled out and expected political stability in the US (its closest neighbor and business partner) might cause a hawkish BoC today. If that happens, further rallies for the CAD is very much likely across the board.
USDCAD has turned bearish with the current risk-on after starting on a front foot. The currency pair is currently testing the 1.27 psychological level. With a possibly hawkish BoC together with a maintained risk-on mood and rallying oil prices, the currency pair could touch the 1.26 psychological level this week.
Bank of Japan Monetary Policy
Since April 2015, when japan’s inflation plummeted to 0.6% from 2.3%, the BoJ have been unable to hit their inflation target. The November release shows an inflation rate of -0.9%. The policy rate remains unchanged at -0.1%. The bank is expected to keep rates the way they are. However, updates on its monetary easing policy will be the key indicator the market is looking for.
USDJPY is back on the back-foot after the Tuesday resistance below the 104.2 key level. With the dollar on the ground and risk-on persisting, the dollar-yen could plummet further to 103 after a minor recovery to retest prices below 104. However, in the medium-term, USDJPY could return upside toward 105.
What’s coming ahead?
Going forward, risk sentiment remains the major market indicator. If after Biden, risk-on persists, we should see the stock market and risky Fx glide fast to the upside while USD, CHF and JPY continue the downward slope. Commodities should add to gains especially the oil market.
The crypto market should remain in the current corrective stage from a pure technical perspective. Bitcoin could be off to $28,000 in the medium-term. The Alts are expected to follow with Litecoin already showing significant resumption of the bearish correction. Fresh buyers might be looking for another opportunity to pump the crypto dips. At the end of the current corrections, the next target for Bitcoin should surpass $60,000.
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