Currency markets
FX markets have been joggled into action, as risk sentiment has not precisely fallen off a cliff, just as the bears always seem to expect on a Monday.
Although if pressed for a view, this morning's price action seems more related to position-squaring on new USD longs rather than anything else.
Overall, the FX market has a similar lean today as the one exhibited last week, where traders stayed for the most part, in a cautionary "wait and see mode", as the virus case-counts sprung higher stateside.
But as it stands at half-time Asia today, currency markets are moving higher while continuing to trade" risk-on" tangentially to the level of the S&P 500 E-minis, which has been the case, only briefly punctuated last week, since Mid May.
Still, the US dollar's relationship with equities is one to watch this week, having decoupled last week after exhibiting a robust negative correlation since mid-May.
Up until that point, G-10 FX was characterized by a remarkable interest for EUR/USD topside structures, then into the week-end, interest has nearly disappeared, with spot struggling to hold support level at 1.1200
Less-convincing USD correlations can provide early signs that currency drivers are changing.
In G10, this would leave AUD, NZD, and to a lesser extent, GBP vulnerable.
The sentiment around GBP remains bearish, and there has been more downside interest in options, albeit subdued, where demand is still for July tenor to capture the noise around negotiation talks, with an extension to the year-end deadline ruled out, for now.
If the Fed continues pushing back against the idea of negative policy rates, we could see GBP and NZD underperform, with the BoE and RBNZ topically more open to the idea of moving below zero.
Sticking with the crosses, the long EUR/GBP last week going into the BoE was a home run. Long AUD/NZD is attractive up to the RBNZ meeting this week.
The RBNZ is widely expected to leave the official cash rate (OCR) unchanged at 0.25%. However, the focus will be on the possibility of negative rates. The rates market is only pricing in a ~20% probability of a 25bp rate cut up to and including the November meeting (the last one of the year), which is far too modest, since Governor Orr could move into negative before November. At the May 13 meeting, the RBNZ reaffirmed its forward guidance for the OCR at 0.25% until early 2021, while noting that, “discussions with financial institutions about preparing for a negative OCR are ongoing.”
Asia FX
For Asia FX, a sustained selloff vs. USD is hard to envisage without a pick-up in US rates volatility, which is back in the ranges last seen in January. While Fed speakers consistently downplay the possibility of negative rates (Vice-Chair Clarida the latest on Friday), yield-curve control is more of an open question and should keep rates volatility contained. So there should be absolutely no need to worry about holding Asia FX longs unless the world turns awash with COVID-19 infection again. While this is an unlikely scenario, it is a huge tail-risk nonetheless and still hard to ignore. It will take a while for markets to desensitize from the unavoidable, small-level outbreaks. In the US, its a matter of time before the infection-curve flattens in the bigger states.
India-China tensions only temporarily interrupted the positive risk sentiment, and the main interest on the back of that (even though very mild) has been to fade the spike on USD/INR and, likewise, USD/KRW, where tensions were hitting the wires last week also.
US-China relations look less sour after talks between US Secretary of State, Michael Pompeo, and China's senior foreign policy official yielded new commitments regarding the phase one trade deal. Pompeo tweeted that China had reasserted its commitment to honoring the stipulations of the agreement. A key element is China's promise to buy significantly more US agricultural goods, an endeavor hampered by the COVID-19 outbreak.
Gold markets
Gold pushed higher, continuing to take center-stage in a COVID-19 environment. I think everyone is finally resigning themselves that, regardless of a possible pick-up in inflation or other negative consequences, there will be continued stimulus throughout the world for a long time to come. We expect this will likely keep gold prices supported in the long term.
After the Beijing outbreak, even although it's thought to be "contained," worries rebounded as infections rose in the US, causing the case-count globally to get re-evaluated. This was especially the case after Apple (NASDAQ:AAPL) said it would close some stores in light of the increase in infections. The Apple headline especially helped float gold higher, but gold is supported by more than just the COVID-19 infection rate. Gold investors think they have the most reliable, gold market-friendly central banks of all time that will backstop their gold fever, or so they hope.
Oil markets
Oil markets remain bid, as traders continue to price in the principle of compensation, which elevates OPEC+ compliance to a whole new level.
2020 will be a challenging year for the oil industry, given the multitude of uncertainly. But one thing that's certain - demand is roaring back as consumers emerge from lockdown, suggesting that both supply and demand curves continue to move in opposite, but bullish directions, for prices through the next few months.
And what is critical in the COVID-19 oil-pricing dynamics, especially at current levels, is the notion that governments will avoid, at all costs, re-imposing wide-sweeping lockdowns, deferring to handle them on a proximity, or soft lockdown, basis.