Currency markets

G10 FX vols are holding in for now in though spot markets are slow due to the Lunar New Year holidays across the region. Implied levels are already low, and concerns regarding the new coronavirus outbreak continue, so market makers do not want to be short just in case contagion fear escalates over the weekend. If the virus outbreak expands, it could significantly impact the currency market at the Monday open when liquidity is sure to be thin with Australia, Singapore, and Hong Kong markets closed.

 

Oil

It was a bit of a nothing burger on fuels in Asia as the timely decline on the US crude inventories and the WHO's decision not to declare the new coronavirus outbreak as an international emergency provided a big enough band-aide to stop the oil market bleeding.

Too many Asian big oil traders are sidelined today, and the chatlines were empty. So, nothing to be gleaned from today's price action, although the calm would argue for more short positions to cover into the weekend. But with the oil market likely to bear the brunt of any flu fall out, and if the current level of contagion mushrooms, that thought alone would suggest few if any oil traders would be willing to build "long position" risk ahead of the weekend.

 

Gold

The strategic buyers continue to buy gold dips in part because of the weekend risk but mostly for reasons beyond the flu virus. At the current projected contagion level and low mortality rate, the Wuhan flu is unlikely to have any material impact on Fed policy.

However, next week Chairman Powell will be grilled about the financial stability risks created via the Fed's liquidity injection due to balance sheet expansion. There's no blueprint for unwinding the balance sheet without some element of risk, but gold offers the ultimate hedge for a Fed policy or even communication misstep.

It remains a very comfortable environment to own gold with US yields drifting lower and 10-year TIPS lingering around the lower end of the range. The more prolonged low yield environment continues to add to golds allure as a must-have hedge against the backdrop of a plethora of market uncertainties.

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