With many countries in the West attempting to reopen their economies, attention has turned to whether new infection rates will remain low as mobility picks up. And even if the reopening momentum takes risk assets broadly higher over the near term, it might still be too early to sell the dollar with reckless abandonment but selectively yes.
The Chinese Yuan
Despite the improved tone on trade via a planned US-China trade chiefs call this week. Most Yuan watchers believe the latest trade calming comments will fall well short of settling the bilateral and what could soon emerge as multi-pronged disputes more generally. Particularly in light of the upcoming US presidential election, which will see both parties charging the election stage with trade war playbooks in hand. Notwithstanding the difficulty, China may face in meeting the $200 bn purchase agreement.
This noise is causing much bidirectional risk for the Yuan despite the market sidestepping and placing on the back burner President Trump's first significant trade salvo in a while. But history reminds us that trade war news flow usually recycles in fits and starts.
On the one hand, it is not in China's best interest to weaken the Yuan and fan the global trade war flames. And assuming that both parties confirm the modest tariff reduction under the 'Phase 1' agreement after this week's phone call. The Yuan could move back down to 7.05 level, and then that brings the year-end 6.95 back in play.
President Trump indicated on Wednesday that he would report on China's progress buying US imports "in about a week or two." Rising US-China tensions can affect Yuan negatively and quickly by reducing cross-border portfolio flows.
So, until President Trump gives the all-clear signal that China intends to honor their trade commitments, we could see traders enter long USD/CNH hedges on dips as a trade war insurance hedge.
If you believe that we are rotating from the equity rebound / Flattening the Curve / Fed Largesse to a more sinister Blame Game increasing the risk of China repatriations, then long USD/CNH is the easy way to play it.
The Euro
On a narrow reading, the German Constitutional Court's request for the ECB to show that its first sovereign QE program (PSPP) was "proportional" doesn't look like a bridge too far to cross. But the broader implications for markets are more worrisome, in part because it reinforces the view that ECB is operating under certain limitations and remain bridled to antiquated policy constraints ill-suited for this current crisis. So, it may mean market pressure, equity market rout, or the EUR/USD trading considerably lower to be the compelling mechanism for any further steps toward fiscal risk-sharing. So, amid the Eurozone legal squabbling, there could remain downside pressure on the EUR/USD at least until the debt. mutualization issues are resolved
The Norwegian Krone
Norges Bank surprised the market by cutting its policy rate to zero last week. However, the Executive Committee made clear that it does not plan to cut rates into negative territory and revealed that it intervened to support the currency to the tune of NOK 3.5bn in late March.
Interest rate policy transmission via a one-off rate cut does not change the fundamental picture for the currency (or any currency for that matter), given depressed front-end rates across the G10. Moreover, the country stands to benefit from the rebound in oil prices. I am reiterating my positive outlook for the NOK from last week.
The Japanese Yen
The yen has a favorable balance between a currency that is cheap on most metrics but does not have a cost of carry as a disadvantage and acting as an anvil on its back.
And although there have been numerous stops and starts in Japan's attempt to exit from the virus its certainly one of the more advanced North Asia countries and leaps and bounds ahead of the Euro area and North America.
With the Eurozone trials and tribulation over providing a unified policy response to the crisis, it is tending to highlight the yen as a significant currency alternative. It is reflected in downward pressure on EUR/JPY.
Generally, during the recessionary time, it is higher oil price shocks that resulted in terms of trade imbalances for the yen. This time around with oil prices languishing, this will be a boost to terms of trade from the start of the recovery. While positioning is starting to lean long Yen (mostly via EUR/JPY), it is far from overextended outside the bump up seen in CFTC asset manager positions; equivalent leverage positioning is very modest.
With the GPIF finishing off their global bond-buying splurge, there are positive signs that Japanese real money is starting to shift their flows and, more importantly, their hedge ratios on the outstanding stock of foreign assets.
Since 2018 Japanese life insurers have been running low hedge ratios on their USD assets, due to the stronger dollar. If the yen veers below Y105 and lurks there for a while, which is widely viewed as the trough in the long term rage trade play, it may trigger Japanese lifers into action, then higher Japanese hedge ratios on USD assets will drive the USD/JPY lower in a cascading effect. We are not there yet, but the markets are moving in that direction and could be worth putting a few bob or two on the stronger yen narrative as the yen has not been this captivating in years.
The Malaysian Ringgit
The Ringgit should trade on more stable footing supported by rising Brent crude oil prices. However, regional optimism remains slightly tarnished by the coronavirus blame-game and a looming US Presidential election, which could prove to be s a toxic recipe for US-China relations. As Politics, Trade, Technology, and Capital markets are the critical fissure points again.
Short term currency trades
The US dollar can selectively sell-off if investors differentiate those economies returning to social normalcy sooner. Australia, China, New Zealand, South Korea, Sweden, and Taiwan are out in front on this metric. Although though worries about another wave of coronavirus infections could complicate these trades.
Gold market
The US jobs report it tarnished gold luster, as focus shifted from the headline data to the positive rebound in hourly earning. Before NFP, gold traded up, building on substantial gains made the previous day. Firm prices in Europe and Asia lasted into early US trading. Gold rallied despite the broader financial markets adopting a mild "risk-on" tone, which is usually unfavorable for gold. But that correlation has broken down of late as equity market "risk-on "appetite is primarily driven by central bank largesse, which is equally supportive for gold.
Gold took a knock, but the uptrend remains firm since gold has a plethora of factors in its favor and none more so than the latest Eurozone legal imbroglio. Germany's former finance minister, Wolfgang Schaeuble, said the German constitutional court's ruling means "the existence of the euro may be now put into question in other European Union member states" (Redaktionsnetzwerk Deutschland). This is the kind of comment that can add jet fuel to the gold rally
While the trade war flames eased into the weekend based on telephone talks between US and Chinese officials this week, it is far too early to put these frictions to bed
And even herd immunity on the virus front may not mean the end to the gold rally, debt increases will play a key in the background and will eventually lead to the dollar demise.
On the surface, the USD seems destined not to crack, not because it is stable but because there remain few alternatives. Once investors find a non-US investment alternative that is attractive, then perhaps the worm turns on the Greenback. In the meantime, it is going to be a grind being short US dollars but not extremely attractive to own them either with little carry to show.
The first signs of a crack in the US dollar dominance could occur via the yen, so USD/JPY 106-105.50 could be a significant signpost for gold traders. Still, you probably want to back up the truck on dips before that yen trade eventuates as you might be looking back at XAU/USD $1700 with nostalgic longing.