FX and gold market analysis: US dollar falls on softer yields

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

The US dollar is weaker this morning on a combination of lower US yields and more robust equity markets.

The saving grace for stocks may have been lower US yields, with 10Y Treasury yields now 8bp lower in the last 48 hours. It is not clear what the catalyst was for the reversal lower in yields, but it has taken the USD lower in sympathy.

My guess is with the market looking into their FOMC viewfinder and today’s ten-year auction and CPI print garnering more attention than usual in this extremely yield-sensitive US dollar market, short bonds pared, and along with them, some long dollar profit-taking was the order of the day.

With next week FOMC squarely in the market’s crosshairs, if the US Federal Reserve truly believes inflationary pressures are nowhere near what they seem, then they should make it abundantly clear they do not intend to raise rates anywhere near as early, as fast or to a level currently being priced by the street.

Asia FX sentiment is much more stable this morning, led by USDCNH after People’s Bank of China (PBoC) Deputy Governor Chen Yulu reiterated that China will steadily and prudently push forward capital account convertibility and promote yuan internationalisation. This provided the succour to the US yield onslaught that had caught local Asia FX traders leaning the other way thinking the PBoC was open to a weaker Yuan.

Ringgit under pressure as oil falls

After getting battered and bruised most of yesterday, touching above 4.13, the Malaysian ringgit improved in line with its ASEAN peers on the back of softer US yields and FX risk-friendly comments from the PBoC.

But this morning, the local unit isn’t getting much help from oil as prices have fallen as positions have gotten a bit too stretched. Look for more range trading ahead of today’s US bond auction and CPI data.

Gold’s relief rally

The relief rally has extended on the back of softer US yields, and with ETF and Comex, speculative net length reduced by the tune of 12.5 million as year-to-date positioning is much cleaner.

And a lot of physical supply coming to market is getting absorbed by real money allocators below US$1700; things might not be as bad as they seem.

According to Gold Wholesalers in Zurich, India demand has been incredibly robust, and bars destined for the region has increased – the 5-percentage point reduction in import duty helps.

Still, the key has been demand elasticity, with rupee-denominated gold now at desirable levels.

China demand has recovered this year. Premiums are hovering around US$10 above London. And from what I currently understand, the authorities are yet to award import duties, but I’m hearing that local stocks are close to being depleted on a post-Lunar New Year buying bonanza.

While the elephant in the room remains ETF selling as US bond yields move higher and investors sell gold in favour of cyclical stocks, the gold price may have found a floor here and could be comfortable in the $1700s range for a bit as physical demand remains stout.