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Asia Open | FX & Gold: Nothing lasts forever as the sweet flavor of "risk-on" has given way to the sour taste of "risk-off"

Market Analysis / 4 Min Read
Stephen Innes / 12 Jun 2020


Memories of March distressed gold sales as the equity market’s overnight plummet has likely weighed on gold fortunes. I’m always cautious about how to interpret a gold move higher on Covid-19 headlines that are arguably deflationary and, if anything, cause people to sell gold in favor of putting money under the mattress for rainy days.
Currency Markets

The FX market turned its toggle to "risk-off" mode over the past 24 hours with the USD more robust, and the high beta AUD, NZD, and NOK all weaker.
Numerous factors can explain the change in the mood music, but the most important one is probably positioning after the surge in risk appetite over the last two weeks had perhaps moved the needle a bit too far.
With risk sentiment in the tank, USD Asia will struggle as it’s exporter dependant, and equity inflow currencies alike will fall prey to the USD safe-haven appeal. The playbook suggests investors will seek temporary shelter under the US bond market umbrella until clarity emerges on the US Covid-19 situation to the Greenback’s benefit.
After putting on a strong performance earlier in the week, the Ringgit looks particularly susceptible to the toxic elixir of lower oil prices and struggling risk sentiment.
Misleading? Possibly. But it’s hard to ignore the numbers

Talk of a 'second wave' of the virus in the US is a bit misleading; it’s still the first wave, which in some US states has never been brought under control. The risk of a real second wave will be next winter, but the overnight market move is giving investors a taste of what might become the actual global market meltdown in the form of the second wave of a worldwide pandemic. And it’s not pretty. 

CNBC tweeted (shared from Early Bird Twitter): "It's not a second wave," former FDA commissioner Dr. Scott Gottlieb says about the new coronavirus cases in states like Arizona and Texas. "They never really got rid of the first wave," he said. 
Perceptible shift pre-FOMC

There was a perceptible shift in sentiment early in the week foreshadowing that FX traders, in particular, were becoming more mindful of any negative news and more inclined to find the threat within breaking headlines news. Thus the initial rise in risk appetite on the Fed's "dot" path of unchanged rates through 2022 gave way to concerns about economic blemish. 
Most FX pros had moved and advised to move the duration playbook from 3-5 days to 1-3 hours this week while playing the crosses rather than test the fickle nature of risk sentiment (see my June 10 note) when things started to look a bit 'toppish' with Robin Hood and his merry men "stocked" up into the FOMC.

But it was the possibility of a second wave of Covid-19 cases as economies emerge from lockdown that becomes the market focus amid recent US case count data, which has undoubtedly spooked every investor on the planet. 
Florida posted the highest number of new cases in a week, Texas posted its most significant daily change since the pandemic started, and Arizona also sees much higher case numbers. However, the number of new cases in the US as a whole is decelerating, mainly because of the improvement in New York. Also, it’s not clear whether this is a second wave or merely the geographic spread of the first wave. 
The White House Coronavirus Task Force has yet to see any relationship between reopening and increased cases of COVID-19, according to Food and Drug Administration Commissioner Stephen Hahn (Bloomberg) 

Are you looking to short the USD again?
If one is looking to engage shorting the dollar, with the rising threat of a second wave of the virus, these thoughts are probably best left until next week. 

But for the "brave of heart", less risk-sensitive currencies may start to outperform because many have substantial current account surpluses. The Fed maintained its commitment to buy everything and the new macro bellwethers like TY, 5s30s and gold all point to further dollar weakness. 
The preferred USD short was opening up to be the Euro,  that was until the NY session. Still, the Euro has proved resilient despite being stretched on momentum indicators and today's equity selloff. I think the long EURUSD will evolve from a short-term positioning/technical/catalyst driven trade to a more enduring trend. 
The trade is pretty straight forward as significant asset re-allocation moves into the Eurozone, which should offer up reasonable support for the Euro over the medium term. The US dollar becomes more burdened by the Fed's massive balance sheet expansions, compounded by the higher possibility they may need to move the rates needle lower, shift to YCC or a combination of both to stabilize the US market.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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