Even Kim Kayne help the Dollar

Precious metals are once again front and centre in Asia this morning. But it is silver that continues to glitter brightest, although gold is certainly not dull. As is becoming the norm of late, silver has exploded higher in early Asia, up by 5.70% again today, dragging gold higher with it, climbing 1.50% itself. 

The precious metals are merely the brightest envoys though of renewed momentum in the great US Dollar rotation trade. The greenback was heavily sold on currency markets overnight as well, with the Euro, in particular, running rampant, boosted by impressive German IFO data. 

As is the markets want, there is an insatiable need to fit facts to the short-term price movements, with some notable financial papers falling into the trap. For example, if the great and the good of the investment world are suddenly worried about the US economic recovery, why did US stock markets rise impressively overnight? The story this week is the Dollars fading haven lustre as Covid-19 threatens to nip the United States' economic recovery in the bud. That theory does have merit. But in case nobody has noticed, Covid-19 has been rampaging across the US sunbelt for weeks now. Nobody cared last week, so why did it suddenly become important now? Please see above for the answer.

The answer itself lies in the Federal Reserve FOMC meeting this week. The Fed is expected to be ultra-dovish in its statements after the meeting, and I find it bemusing that the markets are suddenly handwringing about it. If we are all honest, were they going to be anything else but? Show me a hawkish central bank in the world, and I'll call it Venezuela. The answer lies in the ongoing effects of the uber-dovish Fed. US nominal bond yields will almost certainly continue tracking lower afterwards, if not before. That will push real bond yields further into negative territory, where they are negative right out to the 30-year tenor. 

That is the real reason why the US Dollar sell-off is accelerating. Precious metals pay a zero per cent yield, but if real yields on the US curve are negative, zero per cent looks like a pretty good deal. The bond market is also telling us we can put inflationistas back in their corner as well. The threat of the debasement of fiat currencies is real through bottomless amounts of central bank quantitative easing—another reason why precious metals and bitcoin & co are rallying. 

Bond markets are saying the best we can hope for is a very fat U-shaped recovery. I can't disagree and have changed my tune on 2021 inflation, vaccine arrivals in Q4 or not. The reappearance of Covid-19 in broad swaths of the world; places it had allegedly been controlled, highlights the dangers of both the virus and its potential to nip nascent recoveries in the bud.

The recoveries we see in other parts of the globe with more competent administrations than America's, are fragile. The US Dollar is falling because real yields have joined the negative yield club. A situation is likely to continue to be helped along by the Fed this week. In that light, the US Dollar sell-off is because, for now, the greenback is the ugliest horse in the glue factory. No amount of saying yes to the dress, Botox or Kardashian cosmetics will change that fact anytime soon. 

Regional eyes were focused on Malaysia today with the first verdict due in the trial of former prime minister Najib Razak's 1MDB corruption charges. As well as a test for the new government and the rule of law in Malaysia, international investors are watching closely to see if Malaysia goes back to the future. Mr Razak has just been found guilty. The Ringgit and FKLCI are both holding onto their day's gains post the verdict. Malaysia will remain a regional underperformer, along with the Philippines and Indonesia for the rest of the year. Investors, though, are likely to take heart from the verdict. The Malaysian trade date is expected to make a slight improvement on the headline at midday. But that will mask falls of 8-10% on both the import and export components.

Fitch has reaffirmed China's sovereign debt ratings at A+ with a stable outlook. They note that China is staging a remarkable recovery and have robust external finances. That should give a booster shot to Mainland and regional equity markets this morning.

Elsewhere, New Zealand suspended its extradition treaty with Hong Kong today. Inevitably China has responded by stating the decision is a violation of international law. Something China usually isn't too bothered about when it suits them. If China's usual game plan is followed, some sort of none too subtle retaliation will follow. New Zealand Lamb and Pinot Noir may find itself stuck on the docks with customs delays now. It will be China's loss though, as their best second choice will be from Australia, whom they are also grumpy with. Investors may want to hit the pause button on buying the New Zealand Dollar or shares for the next 24-hours though.

The data calendar internationally is strictly second tier tonight as markets gird themselves for the FOMC rate decision and comment early Thursday morning Asia time. Shock headlines aside, the great US Dollar rotation trade should find no speed bumps over the next 36 hours.

Asian equities march higher

Asian equities are in the green today after an impressive session on Wall Street. In contrast to the end-of-days naysayers in currency markets, Wall Street took an expected uber-dovish Fed as a reason to buy more of everything, assisted by US yields edging lower as well.

The S&P 500 rose 0.74%, the Nasdaq jumped 1.67%, and the Down Jones rose 0.44%. Although the world is in love with the Nasdaq and big-tech, I wish to highlight a cautionary note that should be on investors radars. I noted a bearish outside reversal day on the Nasdaq early in July. That did not play out, but it was the all-time high of the index. Its subsequent bounce topped at precisely the same level, forming a double top at 11,071. The Nasdaq is presently at 10,720, and a failure to recapture 11,071 will be a significant warning shot across the bows. I am not calling the top in equity markets, but readers should pay attention to this technical development.

In Asia, though, markets are serenely in positive territory. The Nikkei 225 is flat on the day, but Mainland China's Shanghai Composite and CSI 300 are higher by 0.55% and 0.95% respectively. Hong Kong has climbed 0.50%. On regional markets, Kuala Lumpur is now 1.0% higher following the Najib verdict, with Jakarta up 0.65% and Singapore up 0.45%.

Equity markets should continue to perform well with only headline risk, and not data risk, to cause a sudden change in the narrative. A weaker US Dollar, improving data ex-USA, and renewed lower rates for longer vigour, should continue to support the rally into the FOMC decision.

Currency markets give back early gains versus the US Dollar

The early gains made by major and regional currencies versus the US Dollar this morning have abruptly reversed, with both groupings now modestly in the red. There have been no headlines to drive the sudden change of heart, but I note that Silver and Gold have suddenly given up all their impressive gains in Asia and are both now lower on the day. It could well be a case of the tail wagging the dog.

Volatility in precious metals aside, that does not change the overall picture from the overnight session. The US Dollar was crushed below the hooves of the stampeding herd. The dollar index fell 0.75% to 93.65 overnight, remaining on track to target support at 93.25 sooner rather than later.

EUR/USD was the star of the overnight session once again, rising to 1.1781 overnight before closing 0.83% higher at 1.1750. The sudden volte-face by currency markets today has seen it ease to 1.1715, with the 1.1800 level still its interim target. GBP/USD broke through 1.2800 on its way to 1.2900 overnight, before retreating to 1.2850 in Asia. Its interim target remains 1.3000.

USD/JPY closed below its breakout level at 106.00, falling 0.70% to 105.38. The 106.00 region now becomes resistance with the overnight low at 105.10 interim support. With Japanese Yen reclaiming its haven lustre, USD/JPY has the potential to move towards 102.00 in the week ahead, after two months of hibernation.

On a more cautionary note, the New Zealand Dollar has now failed four times ahead of 0.6700 over the past week. It is the worst-performing major today, down 0.30% to 0.6660. Having suspended its Hong Kong extradition treaty, and already received growling comments from the Chinese Embassy in Wellington, caution is warranted for long positioning for now. There are obvious risks that both a technical top has formed, and that China may enact reprisals of some sort. The Kiwi is a flightless bird, and either or both could clip its wings. We expect the NZD to underperform versus the AUD and the USD over the next 24 hours.

Elsewhere, Asian currencies are now modestly lower versus the US Dollar after the sudden reversal by precious metals. However, the overall momentum remains undiminished with further gains expected versus the US Dollar in the days ahead.

Oil remains in the vice of opposing forces

Opposing forces continue to squash volatility in energy contracts, leaving both Brent crude and WTI marooned in no-man’s land. Fears over protracted stimulus negotiations and a Covid-19 derived double-dip is capping gains. Meanwhile, a much weaker US Dollar internationally is supporting the downside.

The net result was another relatively quiet session for oil. Brent crude limped 0.30% higher to $43.40 a barrel. For now, it appears to have fallen back into its previous $42.00/$44.00 a barrel range. WTI rose 1.0% to $41.70 a barrel and seems content to bounce around in a $40.50/$42.50 range for now. 

Oil appears to have fallen off investor’s radars for now, as more excitement looms in other markets. The balance of probabilities still favours the rally to continue, but we may need a very dovish Fed to spur buyers to return. Only a daily close below $41.50 a barrel for Brent crude, or $40.00 a barrel for WTI, will suggest that a deeper downside correction will occur first. 

Gold and silver produce emotional volatility in Asia

Precious metals traders' nerves have been frayed today, including the authors, after a sudden reverse over 30 minutes wiped out both metal's impressive early gains. Gold is presently just 0.10% higher for the session at $1944.50 an ounce. Silver is now only 0.25% higher at $26.6580 an ounce. To give readers a clue just how wild the morning session has been, reread paragraph one of this commentary. Net net, silver has fallen 6.0%, and gold by 1.50%, since I started writing!

There is no news to drive the sudden reversals. Silver has been leading gold higher and in recent mornings has exploded higher in Asia and then stayed there. I suspect liquidity and itchy trigger fingers have played their part. Silver is a savage mistress at the best of times, with liquidity usually evaporating on aggressive uni-directional movers. The market may well have reached for stop-losses in both in early trading with liquidity thin, followed by an equally sharp reversal after mission accomplished.

That does not negate the fact that both precious metals staged spectacular rallies yesterday, with gold rising 2.15% to $1942.00 an ounce, and silver rising 8.10% to $24.6000 an ounce. A fall through $1835.00 an ounce, or $24.0000 an ounce on silver, could trigger another fast money stampede for the door. But given the underlying momentum of the rallies, these levels should now hold, as the underlying base case for higher precious metals is stronger than ever.

On that final note, I do acknowledge that my last sentence could be famous last words...