US dollar extends its decline

FX and Gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi, 

The US dollar is extending its modest decline seen so far this week. The initial enthusiasm for the USD this year, built on tapering talk from some Fed officials, has begun to wither.

In part, this is due to push-back from US Fed Chair Powell’s rhetoric, which has underlined that a debate about tapering timing is premature. But significantly with the Fed now in black-out mode ahead of the FOMC meeting next week, the void has been filled with a familiar return to risk appetite as the driver where commodity and risk betas remain in play (AUD, NZD and CAD).

US data releases were constructive, but the USD failed to hold onto any gains suggesting the market at least for now has moved on from taper talk.

So, traders veered back on the bearish US dollar path now thinking the Democrats’ everything including the kitchen sink fiscal stimulus policy approach is terrible for the US dollar.

ECB disappoints Euro bears

The EUR bears were disappointed with the European Central Bank (ECB) president Christine Lagarde playing it by ear.

For the EURO, there are two critical policy clarifications. Firstly: Yes, ECB is watching the euro, but as ever with a view to its influence on inflation forecasts. Secondly: Yes, the PEPP is flexible in terms of how the facility is allocated and whether it is all used up. If the economy recovers quickly, it might not be; if the economy struggles, then it will be.

The ECB were not overly dovish.

1) The ECB indirectly implies that sovereign yields are low enough, and the monetary policy’s real task has switched to policy transmission.

2) The ECB wants to have the option of being less sensitive to an increase in yields when this becomes appropriate.

To put this in easily digestible terms, while the US policymakers are veering on the path of maximum policy overdrive, the ECB remains anchored but flexible. So, with the policy divergence theme in full retreat, the EURUSD is moving higher for now.

Sterling on lift-off mode

With the UK at the head of the G-10 class on the vaccine rollouts, Sterling is in lift-off mode as traders are starting to price real money adjustment piling back into underinvestment UK themes that have been in the tank since Brexit.

The UK equity market has been one of the worst-performing major global markets since the Brexit referendum in June 2016, leaving valuations for UK equities relative to Europe at close to 20-year lows.

On the catch-up premise, the UK remains a favoured global equity markets strategy, particularly from an unhedged perspective. A large proportion of the return for international investors will come from the strengthening currency. When client banking is asking for unhedged instead of fully hedged currency return strategies, it dramatically impacts real currency flow.

Ringgit

The market continues to price out rate cuts after BNM described the current policy stance as “appropriate and accommodative” with some now expecting the next policy move a rate hike as soon as the second quarter of next year.

The Malaysian economy was highly responsive to the previous relaxation in mobility restriction; the thought here is that once the MCO is fully rolled back at the end of February or sooner, consumers will do the bulk of the heavy economic lifting while the PERMAI relief package announced this week would provide an added tailwind.

And with inflation expected to rise this year, even keeping rates unchanged, the inflation impulse offers some modest real easing.

Foreign Exchange Investors continue to focus on the bigger picture where oil prices should rise as we move toward herd immunity. Expectedly, this will provide a big lift to the ringgit via Oil petrol dollar inflows and foreign travellers demand for the ringgit.

Gold meets some resistance

Gold bears have entered a temporary state of hibernation. The yellow metal seems to be past the lows for the month as the current ” everything but the kitchen sink ” policy backdrop and FX tailwinds for precious metals remains favourable.

Resistance lies at the 100-day moving average at $1884. But the market needs a few more ounces of policy conviction for a break higher. Treasury yields should dictate the direction of bullion and a rally could quickly ensue if further inflation expectations kick in.