Asia Open | FX & Gold: Softness underfoot in FX but a better outlook for gold

Market Analysis / 2 Min Read
Stephen Innes / 11 May 2020

The Euro is shifting lower in early trade as tensions in the Eurozone continue to escalate over a German ruling that challenges the European Central Bank's quantitative easing program, adding to the laundry list of woes for the Euro.
 
The Australian dollar
is trading a bit softer ahead of this week's US-China trade call. But sullying the current landscape is China-Australia trade relationships being tested as the Australian government is set to aggressively push back against the Chinese government's reported decision to impose and eye-popping 80% tariffs on imports of Australian barley.
 
The Pound
is trading a tad softer after UK Prime Minister Boris Johnson suggested there would be no immediate end to the government-imposed lockdown, but outlined a gradual plan to resume economic activity.
 
The Ringgit
will trade on better footing with oil prices rallying into the weekend. Still, the currency will need to bide time until the BNM's recent rate cut can work its way through the economy. In the meantime, the U-turn on globalization and the expected fits and starts around US-China tensions do not precisely portray the Ringgit as an attractive alternative investment to the US dollar, but this will gradually improve as Malaysia moves toward easing the MCO restriction.
 
Gold market 
 
There’s been a lot of focus on Fed funds futures having gone negative, possibly signaling market expectations of negative rates in the US. Still, with the better payroll prints to a degree, it lessened that possibility and gold sold off.

The US jobs report tarnished gold’s lustre, as focus shifted from the headline data to the positive rebound in hourly earning. Before NFP, gold traded up, building on substantial gains made the previous day. Firm prices in Europe and Asia lasted into early US trading. Gold rallied despite the broader financial markets adopting a mild "risk-on" tone, which is usually unfavorable for gold. But that correlation has broken down of late as equity market "risk-on" appetite is primarily driven by central bank largesse, which is equally supportive for gold. 
 
Gold took a knock, but the uptrend remains firm since gold has a plethora of factors in its favor and none more so than the latest Eurozone legal imbroglio. Germany's former finance minister, Wolfgang Schaeuble, said the German constitutional court's ruling means "the existence of the Euro may be now put into question in other European Union member states" (Redaktionsnetzwerk Deutschland). This is the kind of comment that can add jet fuel to the gold rally.
 
Given that risks abound, you probably want to own gold for what’s happening right now – and it would certainly help if you had gold in your portfolio for the grim economic events that are yet to unfold. But you unequivocally want to own gold for those things we hope that does not happen down the road.

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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