International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,
How will USD perform in the face of higher equities and increased prospect of more US stimulus? One would assume lower?? However, any time you get a quick fixed-income move in either direction, especially one that challenges a one-sided FOREX view, the market narrative takes a pause.
It appears this time is not different as the investors now struggle to iron out if the triggered inflationary rise in nominal rise yields could be a precursor to a shift in Fed policy, which is the primary key for the US dollar.
Right now, FX dollar shorts are fidgeting about both higher UST yield differentials that favour the US dollar and the pivoting view on growth differentials that could see the US economy w recover quicker than Europe in particular as Joe Biden aggressively pushes vaccination efforts and will achieve herd immunity early.
For the dollar, it might be a case of push and pull where risk-on sentiment and dollar-negative as capital is allocated elsewhere, versus the attraction of higher US yields over the short term.
Most of the street expects the broad US dollar momentum to extend even though the rising 10-year yield differential is leaning in US dollars favour. The logic here is that FX markets are far more sensitive to front end rates which are still pinned down by the 0% FED funds that are not expected to lift off until 2023.
And while taking the US Fed at their word, which might prove to be a calculated error if inflation explodes higher in Q2, Vice Chair Clarida said Friday: he did not expect any QE “tapering” until 2022 suggesting a turnaround for the US dollar is still a way off.
However, I think what you will see is a tightening of short dollar stop-loss levels and a greater reluctancy to sell the dollar with the reckless abandon that most of the big shops on the street were calling. The street’s views might go from selling the dollar across the board to tactically cautious short on less owned USD shorts until shorts reduce.
The real yield move after the Pfizer vaccine announcement in November is instructive, where the dollar rally in G10 was short-lived because fundamental flows were still dollar negative. Still, the dollar rally in gold was more significant given a reliance on real yields rallying.
A bit of a sleeping beauty trade unfolding in USDJPY The US reflation trade gains traction due to the ‘Blue wave’ effect, and US yields have soared. USDJPY is catching up with Treasuries, and there’s room for a move to 106 in the short term.
With the US dollar bounce again as Treasuries yields continue to march higher, USDJPY is approaching the crucial technical level of 104.30-35.
USDASIA continues to retrace higher on higher US yields as are g-5 currencies. The Ringgit is falling on broader USD strength despite higher oil prices as higher UST yields appear to drive underperformance.
Also, Asia FX has lost a primary support anchor after the PBoC set several macro-prudential measures in succession last week to stem the risking Yuan tide.
Gold on the defensive
The US dollar’s recent gains, higher yields, and the equities rally is keeping gold on the defensive.
The gold market spends most of Friday aggressively trimming longs with little support down until USD1825/oz.
Naturally, stop-loss selling on the way down as buying interest from the real money community has lacked in any meaning full way this year which runs counter to seasonal norms.
The sell set-up from technical and fundamental perspective hit gold like a ton of bricks on Friday when the yellow metal sliced like a hot knife through butter at USD1900 with one million ounces loaded and stopped within one second at that critical level.