We saw some pretty choppy price action but in the end, FX markets appear to adopt a risk on tone, with USD and JPY finishing the European trading day in the red. European equities, however, were unable to really recover, closing well in the red, while US indices have been choppy since the US cash open. Crude oil was hit by bearish DoE inventory data.
How did risk on flows eventually win out in FX markets?
As noted above, today’s flows were very choppy, so there is probably not too much point in reading too much into them.
There wasn’t any particular headline, or even theme, that one could argue was convincingly driving sentiment today.
We think, however, that dovish sounding comments from Fed’s Clarida and Bostic yesterday evening set the groundwork for favourable risk flows today, as well as some good signs from US government officials (including the President) further fiscal stimulus might be nearer than anticipated.
Let’s start with the Fed speak; Fed Vice Chair Clarida firmly reiterated that the Fed can and will do more if needed and that there is no limit on how much Treasuries and MBS the Fed can buy. Moreover, he added that the Fed’s Main Street lending facilities will stay in place for as long as necessary.
Fed’s Bostic said that there is more for the Fed to do with US unemployment at such high levels and he is not at all worried about the risk that the Fed's balance sheet growth might cause inflation. Bostic noted some worrying trends in the real-time economic data of the regions/states that are experiencing an increase in Covid-19 cases as of late.
In terms of the new on the US fiscal stimulus front; US President Trump said Americans will get another stimulus check in the next tranche of relief. Elsewhere, a Fox News reported last night noted that the rise in Covid-19 cases is prompting the White House to renew its push to get Senate Republicans to compromise with Democrats and reach a deal on a new stimulus this month.
Anyway, let's talk about today’s most impressive mover, Gold!
Gold - Gold today broke out to its highest levels since 2011 (currently trading around $1810). To the upside, there are a lack of significant levels of resistance so traders will be weighing whether they think the precious metal can advance as high as the $1900 mark over the coming week/months, ahead of a test of the precious metal’s all-time highs of $1920.
As has been the case over the past few weeks, the grind higher may be slow and fraught with ups and downs, but fundamentally speaking, the environment ought to remain supportive for the precious metal. Here I give a few reasons why…
1) Demand for havens such as gold is still strong, given the ongoing risks the Covid-19 outbreak still poses to the post-lockdown economic recovery in major markets such as the US, EU and UK. Throw ongoing concerns regarding global geopolitical/trade tensions (such as between the US and China) into the mix, as well as the US election in November (Biden is seen as a negative for risk assets such as stocks due to his higher tax policies). The economic outlook for 2021 and beyond remains very uncertain.
2) Stimulus, stimulus and more stimulus to come from the Federal Reserve is keeping a lid on USD, and many analysts foresee a lower USD to come over the coming months. Remember, the Fed is out printing pretty much all other global central banks combined (in other words, it QE programme is huge) and continues to sound very dovish. Gold has an inverse relationship with USD, so if the buck resumes its downwards trend of the last few months, gold should be supported.
3) More generally, gold LOVES central bank stimulus anyway - it is one of those assets which (according to financial theories I don't quite understand) has its value increased when interest rates are lowered. Low rates/QE/liquidity operations are here to stay for a long time from pretty much all major central banks. This ought to keep a floor under gold.
USD, EUR, GBP – EUR has been one of the main beneficiaries of today’s softer USD; DXY fell to fresh lows of the week around 96.50, sending EURUSD shooting back above the 1.1300 level to around 1.1330. We were supposedly going to get a compromise proposal on the EU recovery fund from the European Commission today.
Instead, EU Council President Michel just said that much work still needs to be done to get a deal. Expect this compromise proposal to be released prior to next Friday’s EU Council Summit meeting of EU 27 leaders. EUR seems to have front-run some of the positively that traders might be anticipated regarding this proposal (i.e. that it may bring a deal closer.
GBP meanwhile is also benefitting from today’s softer USD. GBPUSD saw visible upside as UK Finance Minister Rishi Sunak announced further details of the UK government’s post-Covid-19 economic recovery strategy. GBPUSD rallied around 20 pips to just above 1.2550 (close to highs of the day), where it now trades. Sunak announced;
- A £1,000 jobs retention bonus for employers who bring workers back
- A raised to stamp duty threshold to £500k (i.e. you can buy £500k house without having to pay any tax), which will last until the 31st of March 2021
- Cuts to VAT for travel and hospitality services for 6 months to 5% from 20%
- Will give an 'eating out discount' in the month of August
GBP seemed to like these spending pledges at the time, although most of them were well flagged in advance. A note of caution, fears about the UK’s poor fiscal position could come back to weigh on GBP in the coming weeks.
AUD, NZD, CAD – All higher, largely as a result of risk on flows.
Havens – Mixed. As noted at the start JPY is being hit by risk on flows, but CHF is actually rallying pretty hard (the SNB won’t like this).
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