The FX market is at a cross point. With one trading month already behind us, the U.S. dollar is surging across the board. EURUSD, AUDUSD, USDJPY – they all suffer from the same thing, a higher greenback. The surprise comes from the fact that every investment house predicted a lower U.S. dollar for 2021. So far, that is not the case, as the reflation theme continues without the dollar weakening.
This week, the quarterly refunding report from the U.S. Treasury Department revised the debt issuance calendar. More precisely, the TGA or Treasury General Account will decrease significantly, meaning that more American dollars are coming to the market. The net effect would be a move lower in the greenback, so a higher EURUSD, AUDUSD, GBPUSD, and a lower USDJPY, and so on.
However, one thing is missing from the overall puzzle – the impact of vaccines on the pandemic and the economic recovery.
Dollar Sharply Higher Since Biden Took Office
The cross point I was mentioning at the start of this article is that traders face a difficult decision. Those believing that the dollar will react to the rise in liquidity, will likely favor a reversal in the USD pairs. On the other hand, some voices argue that the economic impact of the higher vaccination rate in America will create a huge gap between the American economic growth and the rest of the world. As such, the dollar will reflect the new economic reality and will continue to rise with the improvement in the economy.
Another strange thing happened yesterday. The dollar was sharply higher at the start of the North American session against both G10 currencies and emerging markets currencies. At the same time, the stock market kept climbing, suggesting strong risk sentiment. Furthermore, there was no support from rate differentials, as, for example, the five-year rates were more volatile outside the U.S.
Everything above suggests a dollar at a cross point, stretching traders by the day. To complicate things further, the dollar is sharply higher since Biden took office. Could it be that the dollar declined in hopes of Trump winning, and once the market realized the opposite, the dollar turned? Also, could it be that higher stocks and the higher dollar is not an impossible concept these days? At this point, we should not discount any scenario.