FX and Gold market analysis: US dollar turns the corner

Market analysis from Stephen Innes, Chief Global Market Strategist at Axi,

The USD seems to have turned a corner last week with quarter-end demand and rebalancing in stocks out of the way. But after the big move last Monday, the markets have been back and forth.

Still, the dollar has been anchored to the weaker end of the recent range after US Fed officials indicated they had little concern about inflation. It’s still too early to consider tapering monetary support, helping push down Treasury yields to the US dollar detriment. 

As rates volatility drops, correlation fall by the wayside, and FX outside of some micro lurches, becomes relatively range trade tame.

US Fed Chair Powell once again managed to surprise markets on the dovish side, commenting on last week’s 1 million jobs report that “we want to see a string of months like that so we can begin to show progress towards our goals.”

We get our first CPI ‘string’ this week. While we can speculate how many months a ‘string’ is, it certainly means that a couple of reports like that will not be enough to change the Fed’s communication.

In a way, the only thing that could make a difference over the next few months would be higher inflation expectations, possibly on the back of higher-than-expected inflation readings (hence the importance of the CPI this week).

Though for any change in Fed tonality, the hurdle is very high as doggedly defending their communication credibility requires sticking to the narrative. In my view, so long as inflation remains transitory driven, it means that tapering before year-end will be challenging and supports US yields consolidating around 1.6-1.8% or so and the dollar range-bound or slightly weaker.

Asia FX

The higher China inflation prints last week tempered recovery Asia FX sentiment. Asia FX deals with new waves and recurring virus concerns bound to upset the recovery applecart and muddy the anticipated travel boom in popular Asia destination like Thailand and The Philippines, where second waves are taking hold.

Malaysian Ringgit caught in the middle

The ringgit remains stuck in a channel trapped between higher US yields and finicky oil prices.

But a new negative twist has emerged in the form of higher inflation in China due to high commodity prices that could see the PBoC quell China credit impulse.

This is potentially negative for commodity exporters like Malaysia into China if the transitory inflation effects from higher oil prices don’t ebb.

To start the week, local FX traders could remain in the wait and see mode similar to the G-10 colleagues ahead of a key US CPI, which should provide our the first read on the US inflation dial and if it is anywhere nearing a point of consternation for risk assets.

Gold traders on a wait and see mode

Like most other rates sensitive and long duration asset, gold could drift into wait and see mode ahead of the keenly anticipated US CPI release. Any transitory look through or miss lower in the data could be good for gold price.