Risk-On: Does It Really Matter When Virtually Everything But The Dollar Is Up?

US real rates have dropped as a consequence of a deteriorating economic outlook. The real curve has parallel shifted and vectored profoundly lower. Expected inflation is short of 2%; inflation risk premium has declined. The markets are pricing low growth, low inflation, and little Fed influence. The US hasn't even hit bottom yet. So the real curve reaction to the Fed's framework review is supercritical.
 
I suspect cross-asset traders will stay short dollars, long gold ahead of September FOMC likewise, short real yields over the same period, and Long US growth stocks should look attractive in the lower for longer interest rate view.
 
Risk-on or Liquidity- on, does it really matter when everything is going northbound except for the dollar.
 
Driving a wedge 
 
The US continues to drive a wedge between pro-democracy capitalism in the US and state-run capitalism in China. US Health Secretary Alex Azar will visit Taiwan, Bloomberg reports. The news came out a bit earlier, but he will be the highest-ranked US official to visit Taiwan since 1979. And I do have trouble seeing how China will interpret the move, other than provocative ahead of US-China trade talks on August 15.

In a statement, the US health secretary said, "I look forward to conveying President Trump's support for Taiwan's global health leadership and underscoring our shared belief that free and democratic societies are the best model for protecting and promoting health."


Gold
 
Gold ripped through $2000 overnight, and there was some decent acceleration higher on that break, with a significant low in US 10-year yields. Momentum is strong, likely coupled with some short covering, in line with the pop in crude oil prices on the news of an explosion in Beirut. 
 
The latest rise in US-China tensions that brings the P1 trade deal into question adds to an extensive laundry list of concerns that are sending investors toward safe-haven assets, and gold seems to be top of that list. The principle drivers remain the same: a record pace of ETF inflows, the weak USD, and negative real yields.
 
Forex

Asia FX
 
The market widely expects Bank of Thailand to leave the policy rate unchanged at 0.50% at 1530 SGT/0830 BST today, even with the USD/THB fast approaching the June low of 30.84. Still, the Thai economy's current account surplus is likely to shrink sharply due to the negative shift in tourist revenue in 2020.
 
The THB stable beta to gold sees locals unwinding USD/THB longs. 
 
G-10 
 
The dollar bear trade was crowded, and the dollar was oversold, but the resulting correction has been mild so far, and clearly, the dollar has not lost its countercyclical beta.

BTPs are rallying again. US real rates are making all-time lows, and after a clear out of weaker Euro longs, it feels like the USD higher correction trade will have extraordinarily little juice left to squeeze.

But a deal on a new US coronavirus-relief package is a significant risk to low US real yields and a weaker USD narrative, so I suspect the risk is the likelihood we range trade ahead of NFP. At the same time, the markets pivot to September FOMC should keep the dollar skew offered. 
 
On the Euro, once the short-term longs got washed out yesterday, the Euro bulls came out of the woodworks between 1.1725-50 as huge volumes turned on EBS supporting the overall view. 
 
Oil 
 
The theme remains the same with prices stabilizing as demand recovers from 2Q lows but stutters to fully recovering because of the continued negative economic impact of Covid-19 lockdowns and the fear of the virus hampering what should be a consumer lead recovery. The rebound in May-June likely surprised most market participants, but the flat-lining through July raises some downside price risk if positive momentum is exhausted. 
 
The market ignored the API data in favor of sitting tight, trying to figure out what to make of the high-level trade talks scheduled for August 15 between the US and China and the reported review of the Phase one trade deal. Asia has an unfortunate predisposition to heightened US-China trade tensions. But given the deterioration in US-China political relations this year, it suggests constructive talks would be a surprise and could be favorable for Oil. 
 
But cross-asset trader would prefer to trade the positive tails through FX markets, which are a bit less cranky than oil markets these days.