Gold pushes higher as risk-off sentiment increases. The mood in the broader financial markets remained frail. Concerns revolve around the possible consequences of easing lockdown restrictions globally. The markets are also monitoring China's trade relations with the United States and Australia.
But the primary catalyst for gold overnight was Chair Powell, who stated in non-ambiguous terms there will not be a V-shape recovery, implying more stimulus is in the offing but not of the monetary policy variety. Although he didn’t say anything that we didn’t already know, gold investors liked having this made evident: "Liquidity problems turn into solvency problems." This implies that defaults and bankruptcies could come in weeks, not months, and the stock market’s exuberance of 21x forward P/E will be exposed sooner than expected.
The move on gold should be viewed as a hedge on stocks, not on increased expectations of the Fed joining team sub-zero (negative interest rates). So as the SPX recovers, as it’s so apt to do, gold could struggle to reach higher if risk sentiment returns. But I also think traders have no option but to defend the risk of the Fed moving below the LBZ, so gold will remain firmly bid on a dip.
It’s hard to determine the impact on gold based on inflation data, which showed a further slowdown in global inflation. China's consumer-price index for April rose 3.3% y-o-y, according to official data. This was lower than the 3.6% that a survey of Chinese economists had predicted, and down from 5.4% in January. US April headline CPI fell -0.8% m-o-m, matching expectations. Low inflation is ostensibly gold-bearish, but deflation may prompt a higher degree of monetary accommodation, which is gold-positive, though Powell did throw ice water on negative rates.
The US Dollar
This is a bizarre trade when you think about it: What’s terrible for the US economy is excellent for the US dollar. The Greenback rose modestly overnight after Federal Reserve Chair Jerome Powell delivered remarks suggesting the US economy will be in for a prolonged period of weak growth. But the dollar nudged up after Powell downplayed negative rates.
Risk sentiment remains negative. US stocks sold off hard again overnight, while fixed income remains bid. The US dollar has been relatively resilient despite some Fed fund futures trading in negative territory, suggesting haven demand remains keen for the Greenback in the gnarly risk environment.
Traders continue to auger lower in the EURUSD, but the trade is crowded after the GCC finally activated its 'nuclear option,' so attempts below 1.08 could remain sticky.
The Australian Dollar
The Australian dollar sold off on its high beta correlation to US stocks, given that the bulk of Australia's pension fund assets are held overseas. But what should be of interest to the Aussie bulls today is that iron ore export volumes to China from Australia's Port Hedland are up 11% yoy in April, providing more evidence that mining activity is benefiting as China activity rebounds. That is an essential positive for Australian trade amid disputes over beef and barley.
The Chinese Yuan
As far as the regional bellwether Yuan goes, the CNH retreated for a fourth day as the geopolitical spat with the US endures, putting at risk the "phase one" trade deal. A lot of traders are hedging against US-China relations to turn worse before the November election, although Yuan may still appreciate in 4Q if China data support. So, it’s far from a transparent and clear-cut trade at this juncture.
But weighing on near term sentiment is the word on the street that China may propose extending the implementation period of the phase one trade accord due to the massive drop in domestic demand for all products as a result of the virus knockdown.
The Malaysian Ringgit
The Ringgit is trading more balances with oil steadying and a better than expected 1Q GDP print, although the latter is unlikely to endure. So, without a significant recovery in oil demand and prices to subsequently pop higher, the Ringgit will struggle to pivot bullish – although arguably the local unit is on much a better footing than only a week ago. The next test for the Ringgit will be tomorrow's China retail sales and industrial data prints, which could give some indication to Malaysia's economy and the rest of the world what economic life looks like immediately post lockdown.
I expect the ASEAN basket to remain mixed, given the complex multitude of drivers unique to every currency landscape. Please make no mistake: we’re back to the multi-pronged US dollar trade vs. FX Asia; Carry (IDR); Oil (MYR); Trade war (CNH); Equity flow (KRW); Tourism (THB). But, for the most part, Asia FX is getting held hostage by the USD safe-haven appeal as global risk remains toxic and investors shun riskier assets over the near term.
There seems to be some suggestion by analysts or media that Powell, "nipping negative rates in the bud" somehow reduced the chances of the Fed joining team sub-zero. But of course, from a trader's perspective, we know that Powell can say whatever he wants; repeated evidence shows Fed guidance expires as worthless within a week, or even shorter. It’s the market pricing that drives Fed policy, not the other way around. Watch S&P 500, EDM1, FFM1 and 2-year notes for Fed direction.
The talk about negative rates continues. And although Fed members continue to push back against the idea, flows in the 100+ strike calls in Eurodollar continue as trader and risk rates desks at banks are forced to hedge against the risks.
Another take for earlier in the week for Cleveland Fed President Mester said she did not think it was a go-to tool. There was a consensus at the central bank before the coronavirus that negative rates would not work well in the US, however – and this is the crucial point – she said that she did not know that any tool is off the table.
But given the Fed's never-ending desire to ratify market expectations, I’d guess negative rate market pricing will eventually test the credibility of the current "we don't want negative rates" mantra. For this reason, no matter what the Fed says, I wouldn’t be short the 100+ calls in the Eurodollar options markets because that causality probably runs from the market to the Fed, not the Fed to the market.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies