It was a good day for the dollar overnight on a couple of fronts. US economic exceptionalism continues to come to the fore, surprisingly after US retail sales were up 17.7% in May from an estimate of 8.4% and well above the forecasts. Indeed, those are pretty stellar numbers. Control group sales were up 11% compared to estimates for a 5.2% gain, while the weakness in the prior month was also revised lower.
It seems Americans are wasting little time spending those Covid-19 economic impact payments as US consumers’ pent-up demand is flying out of the gates and they’re showing up to every shopping mall reopening party, government checks in hand.
The US dollar has also picked up a head of steam on Fed Chair Powell's comments about the corporate bond market. Chat lines are abuzz this morning as traders are circling back to Chair Powell's comments to congress not wanting to run through the corporate bond market like an "elephant" which made quite a splash on currency traders.
The market consensus has become that the Fed will be aggressive in buying corporate bonds, particularly after Monday's statement. This comment pours a bit of cold water on that, while possibly triggering some concerns around the "Fed put".
Also, geopolitical escalations following deadly border clashes between China and India have dampened the Yuan sentiment, as has the resurgence of Covid-19 in Beijing which has seemingly triggered another wave of safe-haven demand for the US dollar.
Speaking of which, the USDKRW jumped amid the spike in tensions with North Korea, but the pair still defers to the supportive global risk sentiment via equity inflows.
The fickle market mood remains evident with a resurgence in risk appetite in the last 24 hours, aided mostly by hopes for further policy stimulus. But the lack of follow-through on the typical high beta risk plays like the Australian dollar could reflect ongoing nervousness around Covid-19 and geopolitics.
So, with the number of geopolitical fires dotting the landscape, FX traders are thinking it’s wiser to cool their jets a bit on EM and DM currency risk until the current geo-escalations moderately diffuse and they get a more definitive read on how governments around the world will handle isolated Covid-19 outbreaks from a mandated lockdown perspective.
It was a reasonably rangebound session in gold markets. On the one hand, we have geopolitical flashpoints igniting all over the map. On the other, the US dollar is more robust and competing for those same safe-haven flows.
But what about YCC? Isn't that supposed to be super bearish for the USD and bullish for gold? Not today, apparently, as US consumers are showing up to the reopening party ready to spend their government subsidy check, which is bullishly supporting the US dollar today.
So, despite the volumes of ink spilled on the theoretical implication of YCC and how it will be the USD knock out punch, interest rate policy transmission in the G-10 currency market continues to give way to growth optimism any day of the week.
Growth differentials, not interest rate differential, is the driver of G-10 flows, especially with every central bank at 0% cash rates. Sure, if global market economies recover faster than the US market and the Fed sticks to YCC, then the dollar moves lower and gold could then move higher.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll