Asia FX & Gold: Quiet but confident trading in gold markets

Gold Markets

Gold markets traded quietly but confidently overnight despite risk-on sentiment as it pertains to US equity markets. 

The Covid-19 pandemic is at the heart of the recent gains in gold, so with economic positivity emanating on that front gold investors are taking a wait and see breather. But with good news on the economic front hard to come by, gold has stayed firm. This may indicate that investors are not ready to move out of gold until they see recovery as sustainable, or a vaccine or treatment is close at hand.

Stock markets have become a significant substitute for sports betting as gamblers have turned to the markets for their daily fix. The massive surge in new accounts at Robinhood, e-Trade, and Schwab has been an essential source of equity demand since late March as those gambling on stocks using their phones are almost all long-only accounts. Indeed, this in itself could be a good reason to own gold as margin call on a significant CTA summer stock sell-off in low liquidity could push gold much higher.

Besides the novelty "Robinhood hedge," discussions are starting to surface again with commodity prices rising about the non-linear tipping point where inflation and currency debasement truly begin. In my mind, this is the real crux of the long gold argument. 

All this additional stimulus talk is minor in the broader scheme of things. Soon, the world will face an enormous wave of asset price inflation and fiat currency debasement – maybe even the biggest in recorded history. Once the economy returns to pre-pandemic all systems go, the humungous and massive global stimulus will find its way into every liquid asset and trigger hyperinflation. As we saw in 2008/2009, though, the path from government intervention to asset price inflation occurs in fits and starts. But once we reach the "tipping point," you’ll be happy you bought gold. 

Currency Markets 

Higher oil prices and surging US equity markets are providing an impetus for a selective sell-off in the US dollar overnight. More positive sentiment over recent weeks informs traders that markets are de-emphasizing downside risks, most of which are getting papered over by the incomprehensibly massive tailwind feeding into "forward-looking" markets from the extraordinary Fed policy. 

For now, significant monetary and fiscal policy support is combining with greater optimism around economic rebound and is finding its way into every nook and cranny of G-10 currencies. Specifically, those commodities and China sensitive currencies which are also riding on a wave of confidence on expectations for monetary and fiscal easing into and following Friday's National People's Congress are supporting sentiment.

Norwegian Krone and the Canadian Dollar 

Oil sensitive currencies are lighting up, but oil is not the only driver of these markets. Still, a recovery in prices will help terms of trade, credit spreads and macro-prudential concerns in the context of the large balance of state-owned oil producers. 

The Yuan 

Despite growing concerns about US-China tensions, USDCNH has been relatively steady overnight even after China vowed retaliation over US Secretary of State Pompeo's message to Taiwanese President Tsai for her inauguration. The RMB has historically traded stable in the run-up to Chinese and significant global economic and political events, and this is to maintain positive domestic sentiment. The run-up to this year's National People's Congress has failed to be the exception to that rule.

The Australian Dollar 

AUDUSD trades with a high-beta to the S&P 500 and is receiving considerable support by the enduring demand for US equity index futures where Factors/Sectors within the S&P 500 are exhibiting emerging signs of cyclical leadership, which is hugely bullish for risk assets.

China's 'Two Sessions' kicks off on Thursday with the People's Consultative Conference followed by the National People's Congress which gets underway Friday. We should expect a decent policy response that will provide some firepower to the base metals market. Hence, the Australian Dollar should remain cushioned but stands to benefit further from any pick-up in Chinese investment spending.

The Euro 

The Franco-German package remains a big discussion point for investors. Most are still very skeptical while some see it as a potential game-changer. It was a decent day for a risk assets, and the EURUSD consolidated recent gains; Unless other member states oppose, it should be good news for the Euro. Given bearish positioning, there could be further upside potential in the short term. 

The Malaysian Ringgit 

Higher oil prices, a broadly weaker dollar versus the commodity block and generally better risk sentiment globally, should see the Ringgit performing better but it’s likely getting held back a touch by yesterday's weaker than expected CPI report and the never-ending political bruhaha which continues to act as a weight on the Ringgit's back.  

With oil-sensitive currencies lighting up and traders de-emphasizing risk around US-China trade tension, the Ringgit is bound to strengthen all things being equal.