Fed Chair Treasury Secretary Janet Yellen has just assisted her new boss President Biden sign into the law the next tranche of the US’COVID assistance packages at US$1.9 trillion its largest by far.
Furthermore, her latest comments suggest that she is far from over when it comes to assisting the US economy signalling that fiscal and monetary policy in the US are now in complete unison and that Janet Yellen is likely to be the key to all USD commentary for the foreseeable future.
Make no mistake, Janet Yellen entering the US policy scene again is something that FX traders are likely to meet with glee. She is a very solid communicator, meaning FX volatility around announcements should be capped. More importantly she is very clear what her short- and medium-term desire is – pump-prime the economy with copious amounts of USD funds. In short, she is a USD dove.
To illustrate the point here are the mains comments she has made over the past week about how the new administration will likely tackle the COVID economic crisis.
‘We as 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.’ In that rates are historically low and that debt-servicing payments as a share of the economy are lower today than before the 2008 financial crisis.
The flow of USD is pretty clear in the short term. It also highlights that her old institution in the Federal Reserve is on the exact same path, quantitative easing for the foreseeable future, the Federal Funds rate as near to zero as possible, and this won’t change until inflation averages 2% – something that is at least 2 year off.
We should point out that having US fiscal and monetary policy aligned will create some form of inflation, that is its intended goal after all and that yes rates will rise in the future – A USD positive. But Treasury Secretary’s Yellen’s statement coupled with Fed officials from last week show that rates for the foreseeable future will remain in creditably low.
All this stimulus has created a textbook reaction in the risk trade with CHF, JPY and USD easing while the like of EUR, GBP and AUD shifting higher. It a trade that is likely to be correct majority of the time, especially when any policy personal speak. However, in saying that we are aware the US bond market is refusing to go away and has held onto its yield appreciation from 2 weeks ago, this may actually be a USD attraction and a reason to cash out of winning risk trades in the intraweek, so be mindful.