Gold rallied back above USD1,740/oz after recent losses, with shifting and uncertain risk sentiment helping propel gold higher. Monday was a "risk-on" day triggered by news of a potential vaccine while today ended up as a "risk-off" day triggered by a lack of a vaccine after reports circulated that Moderna Inc.'s vaccine study, which was credited in part for Monday's stock market rally, didn't produce enough critical data to assess its success.
In general, some renewed focus on US-Sino relations boosted gold, with the fresh Covid-19 vaccine concerns providing an additional push. Although Larry Kudlow pushed back on the trade war front, suggesting President Trump is not about to tear up the trade deal, that won’t stop the China hawks in the US government pushing for more financial sanctions and tech restrictions.
The White House has reportedly ordered the federal pension to halt investments in Chinese equities. The US has also tightened export controls to China and announced much more stringent additional restrictions on China's Huawei.
The mood in the broader financial markets remained fragile. Concerns revolve around the possible consequences of easing lockdown restrictions globally. The markets are also monitoring China's trade relations with the United States with President Donald Trump laying the lumber on the blame game.
The US has openly blamed China for the epidemic and a recent Pew survey conducted in March found that most Americans view China unfavorably. Couple that with the hawks in the US government pushing financial sanctions and tech restrictions, it seems China will remain in the crosshairs during the election run and probably beyond.
The USD is getting driven by risk sentiment and safe-haven demand. Still, optimism around economies reopening and low volatility in US stock markets suggest that, outside of the JPY, the Greenback might not be in super big demand.
But the primary pain in the G-10 markets has come in EURCHF where short positioning has seen a decent squeeze and the market’s scrambling to buy short-dated gamma contracts. There’s surprise that net flow balance has remained relatively neutral in CHF, given the size of the squeeze.
The Australian Dollar
AUDUSD continues to wax and wane tangentially to US risk markets. However, the pullback has been relatively mild and the Australian Dollar is currently well bid above.6525 as the markets continue to position for risk revival with global economic activity picking up during the reopening phase of the recovery. USDCNH is trading in a tight range, and the China-sensitive AUD is shrugging off trade concerns amid what appears to be a well-supported rally in US equities, albeit with its usual stops and starts.
China's 'Two Sessions' kicks off on Thursday with the People's Consultative Conference, followed by the National People's Congress getting underway on Friday. We should expect a decent policy response that should provide some firepower to the base metals market, hence the Australian Dollar should remain cushioned by – and stands to benefit further from – any pickup in Chinese investment spending.
The Japanese Yen
The BoJ will hold an unscheduled policy meeting on May 22 (from 0900 local time) to discuss new measures to provide funds to banks; you’d imagine this means cheaper liquidity for banks. That’s favorable for financials, but probably not too big of a deal from a macro perspective. There were gains for bank stocks when this was first announced on Apr. 27.
Still, the market quickly covered USDJPY shorts, pushing USDJPY above 108.
The Malaysian Ringgit
The latest edition of the Malaysia political imbroglio has weighed on Ringgit sentiment as the Malaysia presidential Game of Thrones takes another twist amid a still chaotic political landscape.
According to Bloomberg news, Malaysia's opposition leader Anwar Ibrahim said it’s "very unlikely" the current government will last until the next election, even as his coalition lacks a simple majority in parliament. This reversed a somewhat optimistic day yesterday for the Ringgit as higher oil prices were supporting risk sentiment.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower