President Trump poking the US-China hornet's nest again on Fox News amid the backdrop of unprecedented central bank easing provided a spark to ignite gold prices higher. And with Fed Chair Powell hitting the market square between the eyes in suggesting the FOMC are extremely worried about the risks of corporate failure and associated permanent job losses, gold investors were all ears.
The US administration's ongoing criticism of China over Covid-19 will be a staple in gold investors' diets in the leadup to the US election and should provide a positive and lasting backdrop for gold prices into year-end.
While the Fed Chair walked down, the markets lean into negative Fed fund rates this week. However, negative real rates are likely to remain in place and have room to fall further from current levels, maintaining a supportive scrim for gold.
And a further weakening in economic data, global policy easing and declines in real rates should pave the path higher with golden bricks.
The significant rebound in oil prices and the analogous implication on inflation expectations for real interest rates has likely also helped push gold higher.
President Trump's newfound love for the US Dollar. Say what?
Taking to the election soapbox with the SPX trading 200 points south of 3000 and looking for something favorable to chest bump, President Trump has apparently pivoted and is now embracing a strong dollar. "It's a great time to have a strong dollar ... Everybody wants to be in the dollar because we kept it strong. I kept it strong."
Traders initially flocked the greenback before common sense took over, writing Trump's grandstanding off to election brinkmanship. And if you think the Fed forward guidance expires worthless within a week, President Trump's rah-rah effect on the dollar should expire (and it did, within minutes) especially if it’s from the supportive side. The White House wants the dollar weaker.
The US Dollar
The US dollar retreated from a two-week high as stocks rebounded on the back of higher oil prices, triggering a resurgence in the commodity bloc led by the Canadian dollar and Yen the laggard as demand for currency havens ebbed and gave way to glittering gold appeal.
The Australian Dollar
The Australian dollar came back with a vengeance after getting knocked down when a gnarly domestic jobs report showed employment plunged to a record low in April. Higher oil prices supported the Aussie overnight with industrial commodities in tow. While US stocks and gold lifted, this curious correlation helped boost the A$ fortunes.
The Chinese Yuan
The Yuan halted a four-day slide as profit-taking set in ahead of this morning's critical China economic data, which could offer up some positive surprises. But with US-China tension still lingering ominously, the USDCNH is not about to make an aggressive tack for 7.05 anytime soon. The Yuan moves look more or less tied to the broader direction of the USD overnight.
The Malaysian Ringgit
Higher oil prices will be greeted favorably by the Ringgit this morning as the market seems to be putting the doom and gloom oil market expectation in the rear mirror thanks to OPEC+++ compliance and a quick rebound in gasoline consumption globally. Sentiment could pivot even more favorably on a robust read of China's retail sales report, due out later this morning.
Powell ruled out negative rates "for now," leaving the door wide open for the market to price in whatever it wants to price in. This will be an interesting story going forward.
I believe we’re at diminishing returns from China-negative comments as the market becomes desensitized to President Trump's bluster. The question now is whether this stops at a pillow fight or they bring out the boxing gloves. For now, further losses in AUD will require a US stock market capitulation or worsening data out of China.
Traders are probably getting tired of getting no joy chasing the Euro lower as EURUSD is very sticky below 1.08. It still feels to me like we’re in a 1.0730/1.1030 range for EURUSD until the EU economy pivots higher. And on that call, your guess is as good as mine.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support