Asia Open | FX & Gold: A slew of positive reopening developments help boost financial markets but result in negativity for gold.
Market Analysis - 4 Min Read Stephen Innes | 03 Jun 2020
"Risk on" remains in fashion this morning, although it’s not entirely clear what’s prompting the ebullience. Comments from China's officials suggesting purchases of US soybeans are continuing (Global Times) changed the trade war mood music considerably after yesterday's Bloomberg report of a pause in Chinese imports of US agricultural products.
One thing to think about at the moment is the role of the CTAs: if there’s a decisive shift in the technical picture, they’re likely to emerge as the dominant force in markets.
The prospect of additional fiscal stimulus for Germany may have buoyed sentiment in Europe alongside progress on Lufthansa's bailout. The "risk-on" mood is driving the USD weaker, extending the sell-off from mid-April markedly lower in the last few days.
Protests in the US and the possibility of military Humvees taking to the streets of suburbia feature prominently in the media. The continued gains in US equity markets suggest this unrest is not yet impactful on US assets. After all, if stock markets can survive the most profound economic calamity since the great depression, I’m sure they can overcome the current level of civil unrest.
The technical break below support levels on the USD at the end of May has seen the sell-off accelerate. And this morning's bubbly risk-on mood suggests markets are inclined to see the global economic glass as "half full" rather than "half empty", which it was not so long ago.
The recent risk-on tone and optimism that the tide is turning on the virus seem to be having the most significant impact on USD rather than stocks this week. As the world reopens, economies are performing better than expected by early economic indications, triggering unbridled demand for currencies.
The markets have underestimated the power of this SPX rally, and as such most didn’t forecast the strength of the USD sell-off against AUD. While everything else this week is one big correlated blob where Forex looks like it’s leading much of the time, the main driver of the different returns between assets is their relative betas. It’s hard to argue the path of least resistance for the USD is down, but current levels are particularly challenging entry points even for the most ardent USD bear.
The Australian Dollar
The market's primary risk-on barometer, the Australian dollar, continues to flash green. The surge in global equities alone would have boosted the Aussie sentiment, given its high beta, but it was also supported by the outcome of the RBA meeting where the policy was left unchanged and, perhaps more significantly, the RBA opted not to talk down the AUD, even though it was up 5.2% on a trade-weighted basis since the Board last convened on May 5.
Consumer confidence continues to bounce back. China optimism is helping, and the bounce in iron ore prices due to China's demand and mine lockdowns in Brazil provides the cherry on top.
The EUR popped higher overnight against the back-peddling US dollar as markets contemplate extra stimulus on the continent. Germany's Chancellor Merkel will meet with coalition officials today to discuss a further fiscal stimulus of between EUR50-100bn (Bloomberg). The EUR is favorably blitzed on all sides by talk of the stimulus. The ECB looks likely to increase its bond-buying program by EUR500bn at its meeting on Thursday, while the EU this month will negotiate on the details of the EUR750bn recovery fund.
Cable continues to move back towards the April high watermark and critical resistance of 1.2650 – spurred on by a combination of risk on and more favorable mood music on Brexit – as compromise is in the air. The Times says the EU's chief Brexit negotiator has told EU ambassadors that his UK counterpart, David Frost, wants to show progress in the next few weeks to demonstrate that a deal can be done this year. Therefore, the report suggests the UK will compromise first, allowing the EU to compromise in turn. This suggestion of flexibility is somewhat at odds with the rhetoric over the weekend, with each side blaming the other for the lack of progress (Bloomberg, Reuters). A new round of negotiations begins today.
The Malaysian Ringgit
The Ringgit is trading favorably on the back of the broadly weaker US dollar and surging oil prices. The impact of higher oil prices is having a profound effect on high-yielding and commodity-producing currencies. Although the MYR is not considered a high yielder per se, the MGS 10-year note is still near 3% and quite attractive from a hunt for yield perspective – even more so against the backdrop of a weakening USD.
Gold is struggling as equities continue to trade well. A decisive shift towards 'risk-on' investment demand beginning in late Asia trading, moving through Europe and into US action, triggered a notable correction in gold. A slew of positive, or potentially positive, reopening narrative developments _ including more unified stimulus from Europe – were seen as positive for financial markets but negative for gold.
The USD was sharply lower and global equities higher, notably European and US equities. Normally this would weaken gold, but not in this case. Gold and the USD have both been subject to investor demand as safe havens and have tended to rally together this year.
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