The US exceptionalism index, which has admittedly been a poor indicator for the US dollar of late, is climbing higher again as EM struggles, the euro shifts lower and US stocks punch higher.
Meanwhile, the Fed's balance sheet stopped growing exponentially a while ago. This is not news, but after the USD has dropped 10% in a straight line against most G10 pairs, it is worth keeping in mind.
In an interview with Xinhua [in Chinese] on Sunday, PBoC Governor Yi said that China would continue to implement its part of the 'phase one' trade deal with the US and fulfill its pledges to open up the financial sector, despite worsening relations between the two countries which is undoubtedly taking the sting out of the US-China trade talks
Asia stocks have opened mostly higher on a de-escalation of trade talk risk premium and on the hope that a heftier US stimulus package will be offered up soon. And growth assets like oil are finding some comfort with the first favorable bend lower in the US COVID case curve in some time.
With hotspots still flaring up around the world, one can never let the COVID-19 guard down as the northern hemisphere pivots to winter months when the virus outbreaks are thought to be more prevalent.
TIPS' price action was reasonably one-way on Monday, with traders interested in selling 5Y swaps or break-even. And coupled with the rise in real yields triggering a stronger dollar, gold is for sale in early Asia trade.
So, with a Xi reaffirming China commitment to the P1 deal and with real US yields rising while getting wrapped in a package of US exceptionalism, long gold positions continue to take profits while fast money traders are likely building more short on a break of $2025.
Overall though, the markets are idling ahead of the trade talks. While President Trump's executive orders have lessened the " cliff-edge " premium, it has not as yet parted the clouds of uncertainly hanging over potential additions to the stimulus package.
US equities were stronger, and oil markets were higher on Monday. Better US sentiment followed President Trump's executive actions over the weekend for households after congressional negotiations failed to reach an agreement last week. And while the "cliff-edge scenario" premium has significantly been reduced, so far, that unilateral action has not prompted congressional Republicans and Democrats to return to the negotiating table. Still, it seems like Treasury Secretary Steven Mnuchin said there are areas for compromise which should be favorable for risk.
Still, the markets seem to be idling before taking its next leap of faith with investors busily reassessing the already hard poached tensions between the US and China ahead of this week's trade talks. And there remains a palatable level of ambiguity about what President Trump's executive orders over the weekend mean. Indeed, it certainly has not parted the clouds of uncertainly hanging over potential additions to the stimulus agreement just yet. But hope remains eternal, President Trump's announcement will provide impetus to negotiations with the Democrats that have stalled lately.
Given the number of "what if "scenarios likely clouding judgment, I expect the equity market skew to be more defensive in Asia compounded by the region's gnarly predisposition to the trade talk risk.
Currency Markets
Euro
The EUR/USD continues to consolidate lower, and just like when you put two violin experts in a room and attempt to appraise a 17th-century fiddle, you get five different answers. That seems to be the case right now as market participants are reaching for reasons why the consensus short-US-dollar trade has suddenly turned astray.
With the FX markets tending to follow, not lead, the fading momentum in the EUR/USD rally may reflect a growing focus on the path of COVID-19 in Europe. Although the new case count remains far below the pace seen during the pandemic's peak, many countries have seen a pick-up as their economies reopened. The headlines remain challenging. Germany's latest data shows the most significant daily increase in new cases since May.
The USD and risk appetite generally is unsure which way to move EUR/USD price action has been less than encouraging in the past few days, with the pair running out of momentum three times just above 1.19 Some longs continue booking profit Still, the pair is now approaching levels where there was good buying interest last week. Currently, it feels more like a consolidation rather than a change in momentum, as European stocks and fixed income are still trading bid; Bund/BTP spreads, for example, are at their lowest since February. I suspect longer-term views are looking to buy EUR/USD on a dip on a pivot to the September FOMC, but with the looming trade talks providing a bit of a "safe haven bid to the buck, the question is where to place that bid.
The Ringgit
The Malaysian ringgit has been predictably backpedaling ahead of this week's US-China trade talks. Still, more generally, the MYR has given ground to the US dollar after last Friday's better than expected US employment report which has seen US dollar demand pick up across the board. Still, more negative for local bond inflows is that US yields have shifted slightly higher.
Arguably the ringgit bullish sentiment may have gotten too far over its skies to quickly, so traders were also quick to book profits on the first signs of weakness.
Gold markets
Gold remains supported by the geopolitical risk and potentially more US fiscal package delays. Still, the next leg higher could prove more challenging with the US dollar showing signs of returning to form, and as US bonds yields move higher on better than expected US economic data. US yields are admittedly low, and this is supportive, but the yield on the 10-year has inched up in the last couple of days, and the USD is slightly higher. That is not to say gold cannot move higher if nominal yields flatline or move marginally higher from current levels; it just means the load falls on other factors to enhance gold from a bullish perspective.
To get the gold smelters working in overtime and add jet fuel to the rally, the Fed will need to do to the heavy lifting vie inflation targeting, or macro scrim will need to see inflation breakeven normalize higher via higher oil prices.
Still, gold loves uncertainly, and there is plenty of that to go around while the yellow metal remains unquestionably supported by monetary accommodation, geopolitical risks, and the US fiscal standoff. But we've to hit some of the most bullish year-end targets already suggesting profit-taking could remain a course of action the longer it takes gold to launch higher. Not to mention, big producers could view these levels as attractive to hedge further production, which continues to flash the amber light on gold markets. Exposure is not correlating to physical demand as old correlations die hard.