Asia FX and Gold: Markets torn between robust cyclical data and surging US virus case counts

Markets 

Western Europe and developed Asian economies continued their grand reopenings with minimal effect on virus transmission at a national level; minor hotspots that did occur were extinguished relatively quickly.
 
But the key in the "China blueprint" narrative is that besides a brief flare-up in Beijing, China has also kept the virus under control. On both the healthcare and economic front, China remains the canary in the coal mine until the US can flatten the curve. 
 
The US remains a bit of a mystery mash. The significant outbreak in the New York Tri-State Area has been trampled down in a similar manner to other major metropolitan areas around the globe. However, transmission rates have picked up over the last month in several southern states, derailing some state reopening plans ahead of the economically crucial July 4 holiday weekend.
 
Ongoing research suggests that limiting large gatherings and even smaller celebrations at bars and restaurants, accompanied by widespread mask use, may significantly reduce virus transmission while allowing large parts of the economy to reopen. This suggests the virus can be contained while keeping the economic costs manageable.
 
Although the temporary rollbacks present a near term speedbump, by no means are they a roadblock to recovery. US containment measures have been a bit of a jumble and whatever political camp you pitch a tent in, both blue and red state responsiveness has been equally poor.
 
I’m not an economist and, after opting for the NatWest trading desk rather than finish my masters, nor am I especially well versed in the finer points of the dismal science. But the market is torn between robust cyclical data, with Citi's surprise indexes registering off the charts, versus a surge in US virus case counts. June was a pretty bumpy month for stocks relative to the smoother sailing in April or May, suggesting the US virus levels are a significant impediment for stocks higher.
 
Still, a lot of crucial risk variables have lit up in June; WTI oil prices have been bullishly anchored to the $40 level (+ 200% from the lows) and China's growth has been resilient while US dollar funding concerns have virtually evaporated. Yet health concerns and the soft rolling lockdown could lead to a soggy patch as the improving data competes with the virus outbreaks. And while the US data for June has been robust so far, we may see some loss of momentum even beyond reversals and pauses to reopening in a growing number of states if people continue to feel unsafe to leave their homes as ultimately it’s consumer traffic that counts.
 
I guess we’ll learn two things from the July 4th weekend 

1) Did US travellers practice social distancing and the curve in the Sun Belt states stay roughly the same? 
2) Did consumer traffic (foot and driving) bound higher?
 
The market could be dealing with a couple of fat tail risks when weekend consumption data rolls in – or at least until Google updates their mobility trackers.
 
Let’s make a deal mode 

After three weeks of push and pull between robust current cyclical data and the increased focus on downside risks from deteriorating US virus news, the market could be moving into "Let's make a deal" mode, but still unsure what door to pick.
 
Behind door number one sits the all-in trade from a vaccine discovery. Behind door number two lies the relatively optimistic economic outcome. But it’s door number three where the prophet of doom sits, reminding us the virus risk will lead to a more significant growth hit in Q3.
 
Most rational views are not banking on a medical breakthrough anytime soon, but the most likely alka seltzer moment will come when signs that the infection spread in critical hotspots is no longer accelerating. And with stricter lockdown and face mask measure being taken across the Sun Belt states, there’s an excellent chance we could see those curves flattening by mid-July.  
 
Currency markets

Euro

One game plan
 
Despite some lingering concerns about the Recovery Fund proposal, it’s unlikely the fiscal hawks will be a big enough voice to upend the majority of apple carts on this significant step toward fiscal integration in the region and put to rest those concerns about the sustainability of the Euro project.
 
With the EU Summit on July 17, I think it’s logical to stay bullish EUR until that date, and unless there’s some substantial negative news development it’s a case of holding the course. The odds seem heavily tilted toward a European agreement and I think the market will price the positive outcome more aggressively as the date nears.
 
Additionally, the rebound from the corona-crisis in Europe has been much smoother than the US due to better virus control and a much smaller increase in unemployment rates.
 
Also, the long stretch of EU stock market underperformance and years of outflows is starting to reverse. With the Euro relatively cheap against the dollar, more sizable EU inflows from the US will likely push the Euro higher.
 
Discussions are starting to surface on whether the US will vote for a Trump or Biden presidency. While it’s too early to price in a ton of election risk, forex optionality behaviors have picked up around the November election date. Given the polling numbers are showing a positive Biden skew, it’s harmful for US stocks and the US dollar given his proposal to reverse half of President Trump's cuts in the corporate income tax rate from 35% to 21%.
 
Asia FX  

It’s a mixed picture in USDAsia with very tight ranges and only small flows to report for Asian currencies. USD PHP, from the New York close, fell to multi-year lows, similar to USDINR on Thursday – though the USD PHP move wasn’t as significant as that seen in USDINR (down about 0.5% vs. a more than 1% drop) or as quick.
 
USDIDR retains its bid tone with continued bond selling and short USD covering. USDKRW is trading in an even tighter range now; the 1198 area is seeing good buying interest.
 
BI 'burden-sharing' is hurting IDR FX as the translation of higher monetary growth to FX is mostly through widening current account deficit, compounded by an overheating economy. The pass-through of money supply expansion into a weaker FX remains a timing question; it’s still a game-changer for the IDR bulls. To suggest the hoards of IDR carry trades are a bit spooked could be a colossal understatement. 
 
Despite the INR being relegated to a second class Asia FX "carry trade" in favor of the IDR only a week ago, with India’s current account set to move into surplus, US interest rate carry-vol healthy and all the fiscal negative baked into the cake, there was always a considerable retracement potential for the INR. That’s even more so now as local carry traders are moving out of the IDR en masse and shifting focus to the INR. 
 
BSP surprised the market by cutting 50bp recently, but that could also be the end of the rate cuts cycle for now. Bonds have performed strongly on the back of rate cuts triggering some offshore demand, which may have helped the currency. The PHP has been resilient due to low oil prices, less dollar funding risks and high-level reserves adequacy providing the Philippines plenty of policy wiggle room to maneuver.
 
The Ringgit has held pretty steady as energy prices continue to improve. Still, the passing dark cloud from the ratings outlook cut continued to weigh on sentiment, as did uncertainty of US-China relations in the wake of the HK law fracas.
 
As for political risk, it’s a short-term speedbump. But as we see time and time again, it’s never really that big of a game-changer for currency markets after all the votes have been counted. 
 
Gold markets
 
Gold is on the verge of testing the psychological $1,800 level. 

The market has been brought higher by continued investor interest amid falling real rates and coronavirus concerns. The pullback from recent highs this week has likely been a positive for risk markets’ double function of favorable vaccine trial results and robust economic data, signaling a continuation of the recovery. But it doesn’t seem that anything matters for gold as it remains bid on a stronger dollar and higher equities. Gold investors could be looking through this economic sweet spot in the recovery anticipating a downswing in the data, which would then be accompanied by even more stimulus.
 
Still, on the other side of the equation, US equity volatility is creeping lower again, particularly since the possibility of good vaccine news rises as time goes on, which could present some concerns for gold positions according to conventional wisdom. 
 
But the vaccine news hasn’t shifted house views aggressively lower, perhaps because the market is now starting to change tact and moving into long US inflation trades which should see the gold appeal part of that inflation discussion. That’s especially so with the Fed committed to keeping interest rates near zero as far as the eye can see while willing to let inflation pressures over steam.