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Analysis

Asia FX & Gold: US dollar remains the king of the safe-haven trade

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.
 
The US dollar strengthened on Monday as appetite for the US dollar as safe-haven currency increased amid concerns over economic reopening.
 
Events in Korea over the weekend brought a reminder of the risks of second waves of coronavirus infections, with Seoul closing down all nightclubs after 34 new infections were tracked down to one club.
 
The Euro 
 
The German Constitutional Court ruling continues to be very actively debated among investors. The GCC finally activated its 'nuclear option' of ruling ECB action unconstitutional, something that many in Germany had hoped could be avoided. But since it's more focused on procedural rather than substantive issues, it leaves the door ajar to amend the situation – at least for the PSPP.
 
With virtually no political appetite in Germany to question its membership in the union, which is critical, and suggestions there could be some unified pushback that the GCC might have underestimated, the Euro continues to trade above 1.08 despite the US dollar safe-haven appeal. 
 
The Japanese Yen
 
The rise in 10 year US bond yields is making the JPY less attractive. But if you think the USD is living on borrowed time, the Yen should look attractive at current levels. 
 
The Australian Dollar
 
The Australian dollar is trading very high beta to risk, basically tracking the US equity benchmarks overnight and perhaps a bit of weakness in the Yuan amid broader USD strength.
 
Meanwhile, friction between China and Australia continues as China threatens tariffs on Australian barley. I’ve touched on the rising tensions between China and Australia a few times recently, but few seem to be covering the story or taking it seriously, outside of local media. It seems essential to me; China buys a third of all Australian exports.
 
The Chinese Yuan 
 
The People's Bank of China over the weekend sounded more dovish in its executive report than the previous ones, which say the CNH gives ground on a yield basis.

There weren't many updates on the geopolitical/trade war front. Still, the USDCNH climbed higher on broader USD strength as Greenback remains the king of the safe-haven trade. 
 
The Malaysian Ringgit 
 
Malaysia returns from holiday today to a market gripped by reopening fears, uncertain oil market and omnipresent trade war clouds still lingering on the horizon. But with oil prices sort of moving in the right direction every week, and with China's central bank signaling more policy measures to support the virus-ravaged economy, it should assist regional risk. But, so far, few are willing to pound the table positively,.  

Gold market  
 

Gold prices moved lower and continue to trade sideways. The sharp upward surge in the dollar generated headwinds for bullion.
 
US yields drove Dollar demand at the long end of the curve, where 30 year Treasury bonds climbed to a seven-week high as traders prepare for an onslaught of issues as the US government looks to fund the Covid-19 recovery through long-dated bonds.
 
The keenly watched 2-year yield Fed SingPost nudged higher on the day, also tarnishing gold’s appeal.
 
But there remain many trepidations in the market about how the post Covid-19 recovery will play out, none more so than assessing the challenges economies face removing restrictions amid the coronavirus pandemic.
 
All this suggests that you may want to own gold for what’s happening now. It would certainly help if you had gold in your portfolio for the grim economic events that are yet to unfold. And you unequivocally want to own gold for those things we hope that never happens.

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