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Yen crumbles as vaccine optimism intensifies, stocks extend gains


    • Safe-haven yen sold across the board as vaccine rollouts fuel hopes of a swift recovery
    • Stocks continue to soar even as global yields creep higher, but dollar fights back
    • Pound scales fresh highs as aggressive vaccination campaign shines light on UK assets

Vaccines keep optimism running high

The expansion in the global rollout of Covid-19 vaccines drove risk appetite to new heights on Tuesday as investors became more confident that inoculating against the deadly virus will lead the global economy out of the pandemic hole. Expectations that governments and central banks will continue to write blank checks to bail out their economies further underscored the bullish mood, lifting demand for risky assets.

The Japanese yen took the brunt of the outflow from safe-haven assets, sliding against all of its major peers for a fourth straight day. The US dollar was headed towards the 4-month top of 105.76 yen set earlier this month, while the euro shot above 128 yen to two-year highs. The aussie and kiwi were approaching two-year peaks too.

The ongoing optimism also kept the greenback on the backfoot. However, the US currency was resisting a deeper selloff. The dollar index is trying to build support in the 90.25 area and has been yo-yoing up and down since the start of this week’s trading.

The Swiss franc was also defying the broader risk-on flows and was mixed against its main rivals.

Nikkei jumps again, Footsie leads in Europe

But there was no doubt about the jubilant mood in equity markets, with Asia finishing the session sharply higher and US stock futures pointing to another record-breaking session on Wall Street when it reopens today from the long holiday weekend.

The cheaper yen boosted the export-heavy Nikkei 225 in Tokyo, as the index closed at a fresh 30-year high today. Chinese markets remained shut for the Lunar New Year holiday, but Hong Kong shares surged on the first day back from the celebrations.

In Europe, London’s FTSE 100 looked set to outperform again, after soaring by 2.5% yesterday. Undervalued UK assets have come into the spotlight this week after the British government reached its mid-February target of vaccinating 15 million people. Prime Minister Boris Johnson is due to unveil his roadmap out of the lockdown next week, which could pave the way for a significant reopening of the economy by late spring.

Shares on the continent were quite sluggish, however, reflecting a slightly more cautious tone.

The slow rollout of vaccines in the European Union has somewhat dented the outlook for the euro area economy and until the pace of immunization catches up with the UK and US, and lockdown restrictions can be loosened substantially, European stocks might struggle to keep up with the global rally.

Rising US yields slow dollar’s fall, loonie retreats with oil prices

Another concern that could be weighing on European equities and could soon become a problem for Wall Street as well is the steeping yield curves around the world. Despite the slightly cloudier outlook for the Eurozone, sovereign bond yields have been on the rise this year, with 10-year German bund yields climbing to 5½-month highs yesterday.

The 10-year yield on US Treasuries, meanwhile, touched 1.25% today for the first time since March 2020, and this is likely providing some support to the dollar amid the positive vaccine backdrop.

The euro and pound were marginally higher versus the greenback, with the single currency edging up to around $1.2150 and cable easing off a near 3-year peak of $1.3951 brushed overnight.

The Australian dollar pulled back slightly too after the RBA stressed the importance of maintaining ultra-loose monetary policy in its February meeting minutes. The loonie also pared earlier gains to stand flat in European trading as oil prices retreated from their highs. Both WTI and Brent crude have rallied to more than one-year highs this week, as apart from the growth optimism, the cold snap in America and some tensions in the Middle East are boosting prices.

The New Zealand dollar, on the other hand, was the best performer on hopes that the newly imposed lockdown on Auckland will be lifted soon after no new virus cases were reported over the past day. The kiwi was last up 0.5% at $0.7262.

XM.COM Review

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-yen-crumbles-as-vaccine-optimism-intensifies-stocks-extend-gains-135906
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