Investors are fading the Fed's doomy outlook after a sustained, stronger-than-consensus run of US economic data. At the same time, they’re supported by the Fed’s unabashedly "risk-on" mantra of monetizing all debt, judging by the steady bid in stock markets.
Range-trading UST yields and low rates volatility suggest investors are embracing the Fed's promise to keep policy accommodative for the foreseeable future.
The US dollar is trading firmer this week despite an 'up' week for equities which shows that the greenback can decouple from equities, having exhibited a robust negative correlation since mid-May.
In G10 FX, the outperformance of USD has been especially pronounced vs. GBP despite a hawkish Bank of England surprised at the pace of asset purchases, while the BoE's Monetary Policy Committee voted 8-1 in favor of adding GBP100 bn of QE.
The GBP and EUR continue to sell off despite the BoE being less dovish and EU debt mutualization. The broader US dollar strength is a developing sign that investors are increasingly focusing on US exceptionalism in coming out of the crisis and that the UK and EU economies will not keep pace.
Surprisingly, high-carry currencies are struggling a touch despite meager and stable US rates volatility. The lull could be reflecting an increased focus on localized health care crisis, but it’s too early to tell.
However, I remain relatively biased towards the local high yielders, especially the IDR which provides some decent yield. With Bank Indonesia seemingly committed to keeping USDIDR from moving higher, it looks as good trade as any to express an Asia risk-on bias.
I still haven't mustered the courage to step back into the INR yet, but once the Covid-19 crises ease and since oil prices should remain relatively contained the INR could be another excellent trade, albeit a riskier way to express a similar lean.
I've never traded on fantasy before, but I had a lucid dream that the vaccine will be ready in time for my parents' annual holiday in Hua Hin, Thailand. So… I bought more THB! Why mention this? I have no idea – perhaps just because it’s Friday after a busy week. Please don’t trade on dreams!
Back in reality, oil looks to be headed for a weekly gain on further signs that demand is picking up as the world emerges from coronavirus lockdown.
Expiry today will focus on a prevalent view based on early flow this week that there’ll continue to be a bid to the broader market into the quadruple "witching" event, which may have explained the sharp move higher in risk during the pre-Asia open session.
As US exceptionalism comes back to the fore, the need for gold in one's portfolio becomes less apparent.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll