Dollar gets its mojo back as US yields march higher, loonie climbs too
US stock markets close at record highs, resilient to rising yields
Quiet start to a busy week, featuring Fed, BoE, and BoJ meetings
Can't hold stock markets down
The narrative that rising bond yields are toxic for stocks came under heavy fire lately. American stock markets hit new record heights last week even as longer-dated Treasury yields moved to new cycle highs, demonstrating that a higher cost of borrowing alone is not enough to demolish equities in an environment of tremendous economic euphoria.
With the US vaccinating roughly three million people per day and a landslide of federal spending about to hit the economy, there isn't much room for pessimism. Economic data over the coming months will likely be incredibly powerful as government spending does the heavy lifting, which in turn is fueling bets for the Fed to raise rates by late 2022-early 2023.
That said, the tech sector is a different story. The negative impact of higher yields on equities is greater if valuations are sky-high, as the stretched multiples on many stocks stop making sense when a higher discount rate is used in a typical valuation model to price them. This is probably why the tech-heavy Nasdaq has been left behind in this rally.
In the bigger picture, the outlook for equities looks quite rosy. The imminent economic boom and the lightning-fast US immunization program suggest that euphoria could continue to dominate markets, at least until the Fed or the government scale back their endless stimulus dose. That's unlikely to happen this year.
Yields revitalize dollar, but loonie shines
In the FX spectrum, the dollar has been the main beneficiary of the latest surge in yields. The US is at the epicenter of the global yield rally since its economy is the strongest at this stage, so the greenback is slowly but surely regaining its interest rate advantage over other currencies, especially against the euro and the yen.
The ECB made it crystal clear last week that it will fight the spike in European yields, while the Bank of Japan is already doing so through its yield curve control strategy. Hence, the upside for European and Japanese yields is limited. If US yields keep marching higher, rate differentials could widen further in the dollar's favor, keeping euro/dollar under pressure and pushing dollar/yen even higher.
The dollar might not perform that well against the commodity-linked currencies, though. Some of the benefits from the enormous US spending packages are bound to spill over into these export-heavy economies as well, commodity prices are already high and rising, and risk sentiment might remain favorable.
As such, the Canadian, Australian, and New Zealand dollars could stand their ground against their US counterpart. But with the same logic, crosses like loonie/yen or euro/aussie could see decent moves. Indeed, the loonie is marching higher on Monday, drawing strength from a solid employment report out of Canada on Friday and higher oil prices.
Quiet start to a very busy week
Elsewhere, the news flow from Europe remains grim. Italy is headed for another national lockdown and the Netherlands became the latest European nation to suspend the AstraZeneca vaccine.
Chinese data released overnight showed a massive jump in some key indicators, but the improvement comes down to base effects kicking in, as the collapse from last February when the economy shut down is removed from the yearly calculations. This is a taste of what to expect globally in the coming months.
As for today, there isn't much on the agenda other than a speech by US President Biden at 17:45 GMT. The rest of the week is action-packed, though. The Federal Reserve, Bank of England, and Bank of Japan will all meet. All eyes will be on the Fed, given the dichotomy between its own interest rate forecasts and market pricing lately.