The US Dollar
The US dollar remains the market's unsinkable Molly Brown. US capital market exceptionalism, led by the mercurial S&P 500, continues to stand tall among all others. Until there’s a viable and attractive non-US investment proposition, the Greenback could remain uncrackable. While it remains awkward owning the US dollar with the principal components in place for a dollar sell-off, the thought of owing Euros is even less palatable.
The Euro (the DXY influencer)
The German constitutional court's ruling was more negative than expected, giving the ECB a three month ultimatum. The EURUSD quickly tanked as the PEPP uncertainty doesn't bode well for one's non-US investment alternative strategies.
Short term traders have been selling the Euro aggressively since month-end, which suggests profit-taking set in below 1.0850. However, the EURUSD could be primed for a test 1.08 as there remains ample uncertaintly regarding this constitutional high court fracas.
The Euro bulls have been dealt a significant blow. The German court decision yesterday, which put itself in disagreement with the European Court of Justice, has traders now thinking worst-case scenario as the ruling opens a legal channel to a German exit from the Eurozone. Not to suggest the Eurozone or the Euro is in imminent danger of collapse; the court decision merely provides exceedingly poor optics for any rational investor who’s looking to diversify some of his or her US holdings.
Until Europe can formulate a consistent response to the crisis, and the ECB becomes less opaque and unbridled from dated policy constraints, the Euro could remain out of favour.
The Australian Dollar (the risk beta)
The most significant near-term risk to AUDUSD is its beta to risk sentiment that could undermine the cross if US equities stumble, especially in the context of growing trade tensions between the US and China. Nonetheless, the RBA's yield curve control approach to unconventional monetary policy is implicitly less dovish than central banks that target purchasing set amounts of issuance, such as the RBNZ.
From the floor's perspective, the AUDNZD upside is more attractive than AUDUSD for now as the straight dollar trade will need to see a combination of the USD cracking and improved data out of China. On the domestic front, however, a possible bullish currency trade might open up the coming weeks once it becomes clear that the US labor market has significant scope to underperform Australia.
Inflows have been disappointing as there’s been no clear superannuation redemption-related flow. Still, these schemes are typically slow to redeem given their long-dated nature, and it might be a little too early to give up on that inflow trade as the first redemption window ends in early July.
The Chinese Yuan (the bellwether)
The market in China reopens on Wednesday after a three-day holiday. And traders expect the CNY fix to be on the low side, as evidenced by the elevated fixing spread. For CNH, flows have been shallow during the holiday with interest to sell USDCNH on upticks as global risk sentiment started to improve with the US-China political imbroglio getting put on the back burner for now. Traders are becoming more comfortable again selling USD within current ranges, provided 7.15 remains the line in the sand.
The Malaysian Ringgit (the ASEAN oil proxy)
The natural stabilizing effect from higher oil prices should continue to resonate with the MYR as Brent futures climb the ladder. Also, the BNM rate cut yesterday should provide a favorable tailwind as local businesses and industries reopen after the MCO hopefully gets lifted mid-month, suggesting Malaysia has beaten the virus and the country is gradually opening for business.
Although, worrisome for local risk sentiment is the constant US election posturing by President Trump and Secretary of State Micheal Pompeo who continue to point to the Wuhan Institute of Virology as the epicenter of the coronavirus. And as they continue to poke that hornet's nest the concern for risk is that, at some point, these accusations could draw the ire of China and headline risk could unnecessarily blow up beyond reason.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll