Asia no longer disconsulate, as US Dollar falters

Friday ended on a flat note for Wall Street, with the US and China tit-for-tat consulate closures leaving markets disconsolate. The weekend press was dominated by the story, and the re-emergence of Covid-19 in Spain, along with surging cases across Australia and South East Asia.

The rotation out of US Dollars continued apace, with Euro, Sterling and gold noted outperformers. USD/JPY appears to be finally on the move as well, with the cross tumbling 0.70% to 106.15 on Friday. More on this later. 

There is cause for the gloom to lift somewhat in Asia today. China Industrial Profits YTD (YOY) fell by -12.80%. The headline number masks an improvement over last month’s -19.30% print, and a steady recovery by the monthly data since January 2020. In the US, the White House and the Senate Republicans have apparently reached "an agreement in principle" on the follow-up coronavirus stimulus package. More details are due to throughout the Asian session. Those narratives should Trump the disconsulate, disconsolate geopolitical moods today.

Gold is front and centre today, with the yellow metal up 1.0% in Asia to $1919.50 an ounce, a hair's breadth from its all-time highs of $1920.30 an ounce. I expect some heavy options-related two-way price action around here, but a break looks imminent. A break of $1920.30 an ounce should see gold rapidly accelerate higher as stop-loss, systematic and technical-related buyers load up. $2000.00 an ounce is the next target, and I wouldn't be surprised to see it achieved relatively quickly.

Data highlights this week will be the Federal Reserve interest rate decision, and China's official manufacturing and non-manufacturing PMI's. We expect no change from the Federal Reserve, with most attention on the accompanying statement after. That will reiterate their ultra-dovish stance. China's PMI's will be more market moving. We expect both to continue to trend higher, and geopolitics and pandemics aside should keep the momentum going in equity, precious metals and currency markets.

We have a slew of big-tech earnings reports later in the week from Apple, Amazon, Alphabet and Facebook. It presents the main risk to the bullish market sentiment, in my opinion. The S&P 500 rally has been skewed by the amount of cash poured into the FAANG+ stocks, increasing their weighting in the index. Their supposedly pandemic-proof business models have driven that. Although I am not expecting any earnings wobbles if, for some reason they do, that could be enough to stop the buy-everything recovery rally in its tracks.

All-in-all, the week has an exciting look about it, notably in the precious metals and currency space, where momentum is clearly accelerating and looking to overshadow moves in equity markets. Underlying the moves is a weaker US Dollar, driven by negative real yields. Positive data from China, a still ultra-dovish Federal Reserve, and a new US pandemic relief package are combining to form some strong following trade-winds for financial markets.

Asian equities move higher in early trade

Wall Street fell on Friday, weighed down by US-China relations. All three major indices fell as investors used geopolitics as an excuse to lock in pre-weekend profits. That has been consigned to history this morning, with positive China data and pandemic relief progress from Washington DC lifting most regional stock markets.

The Nikkei 225 is the exception. Playing catchup to last week after a two-day holiday, the Nikkei 225 has edged 0.50% lower. It is all go elsewhere though, with Mainland China’s Shanghai Composite and CSI 300 both higher by 1.0% this morning. Hong Kong has also risen 0.30%.

Around the region, Singapore, Jakarta and Kuala Lumpur have all risen 0.20%. Gains in Malaysia will be limited ahead of the first court rulings on the former Prime Minister's many corruption cases tomorrow. The settlement between Malaysia and Goldman Sachs over 1MDB-related matters having no noticeable impact on local markets today.

In Australia, stock markets have been muted by the rising Australian Dollar, and the continuing rise in Covid-19 cases in Vi9ctoria state. officials stating, they will need more than six weeks initially mooted to bring the outbreak under control.

Asian stock markets will continue to gratefully ignore geopolitics today, remaining in the green. That should spill into European stock markets, which endured a torrid finish to last week. A fall in the pace of US Covid-19 infections and deaths should also lift spirits. Stock markets may get a further boost as more details of the US Republicans proposed follow-on stimulus package are released.

The US Dollar is lower across the board

Currency markets are on the move today in Asia, with the momentum of the US Dollar rotation spilling into regional currencies, as well as major currencies. The dollar index smashed through support at 94.65 on Friday, falling 0.45% to 94.35. It has moved powerfully lower again today, falling 0.35% to 94.03. It now targets 93.20, the May 2019 lows, implying more US Dollar weakness versus major currencies is to come.

Amongst the major currencies, USD/JPY has perhaps the most significant mover. Having been marooned between 106.00 and 108.00 for two months, USD/JPY on Friday, fell 0.70% to 106.15, having tested 106.00 support during the session. That support has given way immediately this morning, USD/JPY falling 0.50% to 105.60. Should we close at these levels this evening, a powerful technical signal will be created, implying further losses to the 101.00/102.00 regions. Among the majors, the USD/JPY has been stubborn in its refusal to buy into the weaker Dollar story. That it finally has, is a significant signal that another round of general US weakness is about to begin.

EUR/USD and GBP/USD have ignored European Cobid-19 fears from the news wires over the weekend. Having both rallied powerfully on Friday, that momentum has continued in the same manner today. EUR/USD rose 0.50% to 1.1655 on Friday and has jumped 0.35% to 1.1685 this morning. Impressive UK PMI's and Retail Sales lifted Sterling on Friday, with GBP/USD rising 0.40% to 1.2790. Today, GBP/USD's rally continues, rising 0.40% again to 1.2845. Initial targets are 1.1800 and 1.3000 respectively. Although both majors have enjoyed outsized gains over the past week, momentum continues to be strong and, if anything, has increased today. That implies we are still some way distant from any technical corrections.

In China, the PBOC has set another weaker fix at 7.0029 this morning. Both the CNY and CNY are in neutral territory between 7.0000 and 7.0200 versus the US Dollar. Geopolitics at this stage, is balancing out a weaker US Dollar on international markets.

The story is much the same for the other major currencies, with CHF, AUD, NZD and CAD all tracing out strong gains over the past two trading sessions. Again, momentum remains undiminished. In South East Asia, the THB, SGD, MYR and IDR are all recording roughly 0.30% gains this morning. Having lagged the general US Dollar sell-off last week, the US Dollar rotation looks to be finally spilling over, following the lead set by USD/JPY.

Overall, currency markets appear to be girding themselves for another notable leg lower by the US Dollar. With geopolitics the new normal, it seems to fall of the radar as fast as it appears and thankfully so. With a new US stimulus package, a European one, an ultra-dovish Federal Reserve, and China leading Asian recovery hopes, more losses for the US Dollar across the board are set to continue.

Oil prices remain neutral, balanced by opposing forces

If the fireworks are exploding elsewhere, oil markets remain astonishingly quiet by their lofty standards. Friday's session saw both contracts barely changed. Brent crude was unchanged at $43.40 a barrel, and WTI crept 0.50% higher to $41.50 a barrel. This morning, in directionless trading, both have slipped by 0.30%.

Oil appears to be caught between opposing forces, crushing price volatility and ranges. On one hand, the explosion of the Covid-19 pandemic in the US, and its re-emergence elsewhere, is casing worries that a renewed economic slowdown could torpedo demand. On the other hand, a much weaker US Dollar, and positive data and fiscal stimulus news from the US, Asia and Europe are tentatively supporting prices. The net result is that not much is happening at all on the pricing front.

That state of affairs is unlikely to continue though. Brent's price action, in particular, has been a disappointment. Having almost entirely closed its chart gap to $45.00 a barrel, it now sits mid-range at $43.20. Assuming the global recovery continues, oils should grind higher as consumption recovers. However, bullish oil traders may have to contend with a correction lower to thin the bullish herd first.

A break lower by Brent crude through $41.50 a barrel, and through $40.00 a barrel for WTI, implies a speculative culling of longs continues. I expect and drops to be short in duration though, with plenty of physical buyers lurking to scoop up black gold on price dips.

Gold makes new all-time highs as Silver explodes higher

It has been all action in precious metals markets in Asia today. Gold has climbed $30 an ounce, or 1.65%, to a new all-time high of $1333.00 an ounce. Gold immediately passed go in early trade, climbing aggressively to $1919.00 an ounce, with the market seemingly reaching for stop-losses around $1920.30 an ounce, the previous record high for gold. Once that was cleared, we have jumped yet again as systematic and technical buyers have piled into new longs. 

Negative real US yields, a much weaker US Dollar and a good dose of FOMO sees gold's momentum undiminished, even at these lofty heights. Now that the all-time high bugbear is out of the way, I expect gold's momentum to accelerate once again. Gold's next target is $2000.00 an ounce. 

I expect that gold will take a lot less time to reach $2000.00 an ounce, than it did to move from $1820.00 an ounce to $1920.30 an ounce. That gold has risen seven Dollars an ounce, since I started writing this paragraph, is testament to that.

Having consolidated its recent gains by ranging just under $23.0000 an ounce over previous days, Silver has exploded higher today. Silver has jumped by 5.60% to $24.0200 an ounce as I write. The XAU/XAG ratio falling nearly 4.0% to 80.36. 

Liquidity plays its part in the extreme Silver moves we have seen in recent times. Since mid-March, it has quietly below the radar, led stocks and other commodities higher. Silver's dual precious metal and industrial use has finally caught investors eyes, and even at these levels, and with a good dose of fast FOMO money, Silver still does not look overbought.

One clue to this fact is the XAU/XAG ratio which spiked to 129.00 during the mid-March capitulation. That has now corrected to around 80.00. It should be noted though, that this just brings the ratio back to around its average of the past two years, before March. In that context, Silver's exponential rally has only bought XAG/USD; therefore, back to the mean in gold terms.

Silver, therefore, can theoretically continue to rally from here in US Dollar terms, but not become overbought in gold terms. Picking a top in XAG/USD is probably not a wise move, even at this price level. Silver's next target is the August 2013 high around $25.1200 an ounce, with a move above $30.0000 an ounce entirely feasible if gold continues to track higher. Watch the XAU/XAG ration for Silver's next step, and not just price action on XAG/USD itself.