Due to rising stock prices and the large-scale economic measures by U.S. President Biden, the trend of rising long-term U.S. interest rates and a stronger dollar is likely to be the main trend this year. With the dollar turning from the 2020 dollar-weak trend to dollar strength, a complete shift in trading strategy may be necessary. One approach is to discard the uncertain USD/JPY movements and target the AUD and NZD, which are in a strong upward trend.
Note: This article is a reprint and revision of an article from FX攻略.com May 2021 issue. Please be aware that the market information written in the text may differ from the current market.
Profile of Masakazu Sato
Sato Masakazu. After working at a domestic bank, he joined the French Paribas Bank (now BNP Paribas). He has served as an interbank chief dealer, funds manager, senior manager, etc. Subsequently, he became Senior Analyst at a foreign exchange online service with the highest trading volume nationwide. He has been involved in the world of foreign exchange for over 20 years in total. He appears on Radio Nikkei “Stock Complete Live Commentary! Stock Channel,” Stock Voice “Market Wide Foreign Exchange Information,” and regularly delivers market information on Yahoo! Finance.
What are the “Leads and Lags” behind the dollar-strong trend that put 1 USD = 108 JPY!?
Three months into 2021, while stock prices were continuing to reach new highs, the currency market remained relatively mild. Replacing the dollar decline of 2020, at the start of the year the rise in U.S. long-term interest rates pushed the dollar higher. In addition to the $21 trillion stimulus under the Biden administration, the increase in U.S. debt due to these measures, along with a steady stock market drawing risk-on money, has been exerting selling pressure on bonds. Moving forward, the interaction between stock and bond markets is expected to continue to significantly influence the currency market, but it is necessary to monitor how far U.S. long-term rates will rise. In early February, the yield on the U.S. 30-year bond surpassed 2% for the first time in about a year.
Meanwhile, both U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have expressed concerns about the current U.S. labor market, which is nearly 10 million jobs below February 2020, and are strongly backing President Biden's large-scale fiscal stimulus.
In the current exchange-rate environment, there has been “dollar buying in times of crisis,” followed by a market where investors cry when the dollar strengthens in a risk-on environment as well. In any case, since the beginning of the year, the belief that “the dollar is stronger than expected” has been gradually spreading, forcing market participants to adjust their market outlook.
The tricky part is that the dollar’s strength is not accelerating, making it hard to decide to cut dollar shorts. If the dollar were to strengthen sharply, one might be inclined to lock in losses, but the current situation is that the dollar-buying momentum is slow, with dollar tops proving heavy during Tokyo hours, yet after the New York session ends and investors return, the dollar appears to be bought even more.
