On a broad basis, a selloff in the US dollar is accelerating this week and is approaching the Mar. 9 lows. And you know what the say in Asia when the dollar weakens? "Good things are about to happen."
If history holds to form, the local stock market will revel in the weaker dollar while European bourses will explode higher as US money managers come knocking at the Eurex door for no other reason than to escape the weaker US dollar
Yields continue to push lower (10Y: -08973%) and are fast-approaching the December 2012 lows. The bond market's concerns around the medium to long-term prognosis of the US economy largely rest on consumer spending recovery. Given the fragile state of unemployment coupled with a negative output gap, things don't look too rosy stateside looking forward. Still, these ongoing concerns around end-demand can be delineated to the global economy more broadly.
However, the China reflation story and the recovery in industrial metals have the scope to run, so silver should spout a second set of wings.
Silver is up ~13% in the past 24 hours. The market has not been caught short silver, and I doubt there is any pain. This has all the hallmarks of a one-off type demand from a large hedge fund, and if it proves to be so, the question is when it gets exhausted. At this stage, liquidity has evaporated, and speculators are likely on the sidelines.
Similar story for gold this morning. Gold has moved higher since the China retail open, up to $1865.80 from $1845 as one fell swoop all offers were lifted, and liquidity has gone dry.
Gold and silver price action is mirroring post-GFC patterns in so many ways. Inflation break evens are coming back, and real Treasury rates dropping. With a push for the vaccine, the recovery in inflation expectations can go further as oil prices find a more solid footing and thereby drive gold higher even if nominal rates stay flat.
Since the FOMC's appetite to keep the pedal to the metal is staunch, gold and silver will fly as the dollar buckles as rates move lower.
US equities were a little stronger Tuesday, S&P up 0.2%. 10-Y bond yields fell 1bps to 0.60%. Europe's STOXX600 rose 0.3%, and EUR/USD rose to an 18-month high after EU leaders agreed on details for an EU Recovery Fund. The WSJ has likened the deal to Europe's Hamiltonian moment—a reference to Alexander Hamilton. He, as first US Treasury Secretary in the late 1700s, had the US Federal Government absorb the debts of US states. The FT is a little more circumspect, noting the deal falls well short of a fiscal union but hail it as a "huge breakthrough."
Those articles made for great reads at Starbucks last night, but the truth likely lies somewhere in the middle. Still, the eleventh-hour deal unambiguously removes a huge political tail risk. What matters the most for FX markets is that traders perceive the ECB backstop to be unwavering and that European break-up risk is mute. A deal unequivocally does both, and this is where the Euro has room to surge as political policy discord has been at the heart of the single currency embracement since day one.
But what is most significant for stock market sentiment is if investors believe the EU recovery fund, which is the EU's first universal counter cyclic instrument, will be large enough to cover the enormity of the COVID crisis while amplifying growth and investment opportunities. On first blush, the market thinks the agreement is a fair-minded attempt to assuage all of those conditions.
As for the S&P 500, it has wholly lost its economic beta in favor of the vaccine and the wall of money argument backstopped by governments who will do what it will take to see "Main Street" through this gnarly virus and at the same time central banks will monetize all that debt.
Forex
US Dollar
The stock market is exciting, but the monetization proxies are exploding higher and with EU Summit finally over the market, turning the focus to the July 29 FOMC meeting. Recent speeches and statements give traders the impression that the Fed is itching to do something again, just four months since their record interventions in March. The FOMC's appetite to keep the pedal to the metal is staunch. Whether this means an imminent announcement of more formalized and aggressive forward guidance is hard to say. But one thing that I feel safe to say USD longs should be a lot more panicky than USD shorts.
The markets continue to have visions of Fed Chair Powell peeking around the curtain, just eager to rush the FOMC stage with money bags in tow.
AUD Dollar
Metals are officially exploding to the topside thanks to the vaccine news, so AUD/USD is breaking out by reason. There has been a pervasive rally in AUDUSD with the pair breaking the June 8 high of 0.7063 rarefied territories not seen since April 2019 when the high was 0.7206. The positive risk tone helps, but RBA Governor Lowe's speech was a clear catalyst for no other reason than he highlighted the hurdle to ease monetary policy further remains quite high, at least for now. AUDUSD can quickly test the 0.72 level given the lack of technical resistance, supportive risk environment, and relatively hawkish central bank.
The Euro
A "risk-on" mood is evident across much of the FX market this morning on strong equity markets and an EU recovery fund agreement. Even before the overnight resolution among Europe's leaders, the mood in equity markets was buoyant on the vaccine news, but notably in the tech-heavy NASDAQ. Success in Europe added to the tone, and while the Euro was slow to play catch up, it was just a matter of time before profit-taking subsides, and the EUR/USD did explode higher.
Asia FX
USDAsia pairs are drifting lower after the EU recovery fund deal announcement with mostly USD sellers in evidence. Even the outliers— USD/THB and USD/IDR—joined the move, which clearly illustrates how turned off traders are now for holding long US dollar positions.
Malaysian Ringgit
I would expect the ringgit to remain supported against a weaker USD's backdrop and stable oil prices. However, a word of caution is that the market is far more uncertain about oil market recovery than their unambiguous view for a weaker US dollar. But with oil likely to range trade throughout the summer, ultimately, its the fate of the USD dollar, not oil prices that will steer the ringgit ship.
Still, the global risk markets remain supported, and China recovery is on track, all of which should carry the day for the favorable ringgit sentiment.
Gold Markets
Gold markets continue to receive jet fuel from two critical ingredients: government debt and central bank liquidity.
Indeed, it is all about those negative real rates, and with the Fed likely to keep the pedal to the metal on stimulus, yields could go even lower.
On the US government stimulus front, negotiations are ongoing. Still, whatever the outcome will be positive gold markets, as even more enormous government debt and additional spending, will likely be the result.
A redoubtable combination of growth-linked commodities (copper and oil) rising, S&P higher, USD lower, and with more stimulus on the way to ensure that the economic lift-off will not fail to launch, my 2021 target of USD 2,000/oz is within reach.
XAGUSD has traded up to 22.41, following an earlier move to 22.08 from 21.30 on that very same potent combination of growth-linked commodities (copper & oil) higher S&P and lower US dollar.