Asia FX & Gold: Investor optimism over economic reopening in the US could wane

Anarchy in the streets threatens to throw a wet blanket on risk recovery as investor optimism over economic reopening in the US could wane. If American consumers were reluctant to come out of their Covid-19 lockdown cocoon fearing a secondary spreader, it's unlikely they’ll feel any safer with military Humvees rolling down Pennsylvania Avenue. The economic recovery has been dependent on reducing fear. If fear is generated by anarchy in the streets, that will harm the recovery.

Gold markets

For today, the focus will shift to President Trump mobilizing "heavily armed" military to stop protests. Putting boots on the ground to quell civil unrest never ends well. 

Dips remain in demand as evidenced by the gold market’s rapid pivot off $1,700 last week, suggesting traders are looking to build a position as underlying sentiment remains bullish. But as we approach year highs, lingering concerns about gold positioning and reluctance to chase the market higher amid reopening, jubilance continues to hold the rally in check. But the macro conditions support gold as a primary diversifier, and with interest rates near zero it’s a relatively inexpensive hedge with volatility dropping.

The US dollar underlying moves have been less impactful on gold returns of late, but that could change quickly as anarchy in US streets threatens, from a psychological perspective if nothing else, the US dollar’s safe-haven appeal. 

Topical discussion over negative interest rates in the US continues to pique gold investors' interest. Still, with rates near zero I’m not sure how much influence this will have as global monetary policy remains highly supportive. Whereas I’m sure the primary catalyst for gold is the negative real yields.

And, of course, geopolitical trends also look gold supportive. The Center for Geoeconomic Studies of the Council for Foreign Relations pointed out that the US and Australia continue to call out for more clarity from China on the origins of the coronavirus, which seems to get under China's skin.

Currency Markets 

EURUSD finally broke out in the wake of positive EC news, creating gains in all major Euro crosses. Robust risk sentiment pressured the dollar across the board and President Trump's announcements on Friday did not interrupt the trend.

Over the short term, traders will keep an eye on increasing social unrest in the US and the anniversary of Tiananmen Square on June 4.

The riots in the street are particularly worrisome for the dollar bulls. The economic recovery has been dependent on reducing fear and if fear is generated by anarchy in the streets, that will harm the recovery.

We get a flurry of data this week, but I think it’s still too early for it to matter. The June data (released in July and August) will give the first incomplete glimpse of what a reopened US economy looks like. It’s only June, and I hear NYC is still pretty much closed, so a full picture of the reopened economy is still months away.

G-10 

The Euro 

The Euro continues to benefit as several countries across the continent start to reopen their economies. Investor sentiment has also improved significantly since the proposal of shared debt in an EU recovery fund. There still seems to be a mix of an unwinding of bearish EURUSD positions and new building of bullish positions as traders rush in to get some topside exposure. 

I have a feeling the bullish EUR story is fully priced in the very short-term horizon. The markets experienced another failure into 1.1150 overnight, and the market has stalled after month-end despite vast volumes of buying Friday. This doesn’t mean the long EUR trade is over; it may suggest that topside EURUSD decay roll offs are going to be a weight to wear as the market owns plenty of 1.1150 to 1.1300 strikes.

The Australian Dollar 

There’s been no looking back for the Australian dollar after a clear break of the 200dma yesterday in Asia, which comes after testing it three times last week. The break didn’t disappoint the bulls and has triggered a massive Aussie bear market capitulation as waves of short position pain hit the banks around Martin Place en masse. With China data stabilizing above contraction low watermarks and as iron ore surges on robust China demand, the Australian dollar has been one of the primary beneficiaries of the early reflation trade.

The RBA is on tap later today, but I’m struggling to get excited as the policy is expected to remain unchanged. And traders will correctly remain focused on the structurally bullish tailwinds from China PMIs and soaring iron ore prices.

Asia FX

In Asia currency markets the headline that China may halt some US soy imports had little impact on the FX market as the slight risk-on tone persists. China PMI data was basically in line with expectations as the services sector improved. Similar to last week, the USD selling has had a G10 focus but has triggered a wave of closeout USDTWD and USDCNH calls, both vanilla and digital after US President Trump pulled punches on his reactions to the HK law.

US-China relations remain in focus after President Trump announced that special treatment for Hong Kong would be withdrawn. Investors expected this and US-Hong Kong trade is not especially relevant. Investor focus is on what it says about the more significant trade tensions.

The Malaysian Ringgit 

The Malaysian Ringgit has been a primary beneficiary of rising, but more importantly, stabilizing oil prices, suggesting the worst is behind us – along with a tentative de-escalation of trade tension as Trump's White House is busy fire fighting at home. But, overall, the Ringgit is trading with a bounce in its step as the market, especially in Asia FX, continues to unwind long USD hedges.