The AUDUSD continues to wax and wane tangentially to US risk markets.

However, the pullback has been relatively mild, and the Australian dollar is currently well bid above.6525 as the markets continue to position for risk revival as global economic activity picks up during the re-opening phase of the recovery.

USDCNH is trading in a tight range, and the China-sensitive AUD is shrugging off trade concerns amid what appears to be a well-supported rally in US equities, albeit with its usual stops and starts.

China’s ‘Two Sessions’ kicks off on Thursday with the People’s Consultative Conference, followed by the National People’s Congress gets Friday underway.

We should expect a decent policy response that should provide some firepower to the base metals market hence the Australian dollar, which should remain cushioned by and stands to benefit further from any pickup in Chinese investment spending.

Not a big demand for US dollar

The USD is getting driven by risk sentiment and safe-haven demand. Still, optimism around economies re-opening and low volatility in US stock markets suggest outside of the JPY; the greenback might not be in super big demand.

But the primary pain in the G-10 markets has come in EURCHF where short positioning has seen a decent squeeze, and the market is scrambling to buy short-dated gamma contracts. We are surprised that our net flow balance has remained relatively neutral in CHF, given the size of the squeeze.

The Japanese Yen

The Bank of Japan (BoJ) will hold an unscheduled policy meeting on May 22 to discuss new measure to provide funds to banks. I would imagine this means cheaper liquidity for banks.

It is favourable for financials, but probably not too big of a deal from a macro perspective. There were gains for bank stocks when this was first announced on Apr. 27.

Still, the market quickly covered USDJPY shorts pushing USDJPY above 108.

Malaysian Ringgit weighed down by political imbroglio

The latest edition of the Malaysian political imbroglio has weighed on Ringgit sentiment as the Malaysian presidential game of thrones takes another twist amid a still chaotic political landscape.

According to news reports Malaysia’s opposition leader Anwar Ibrahim said it is “very unlikely” the current government will last until the next election, even as his coalition lacks a simple majority in parliament.

This reversed a somewhat optimistic day yesterday for the Ringgit as higher oil prices were supporting risk sentiment.

Gold rallies again

Gold rallied back above USD1,740/oz after recent losses. Shifting and uncertain risk sentiment helped propel gold higher. Monday was a “risk-on” day triggered by a potential vaccine.

And today, it ended up as a “risk-off” day, which was triggered by a lack of a vaccine after reports circulated that Moderna Inc.’s vaccine study, which was credited in part for Monday’s stock market rally, didn’t produce enough critical data to assess its success.

In general, some renewed focus on US-Sino relations boosted gold, and fresh COVID-19 concerns as investors grew skittish about vaccine trials provided an additional push.

Although Larry Kudlow pushed back on the trade war front suggesting President Trump is not about to tear up the trade deal. But that will not stop the China hawks in the US government pushing for more financial sanctions and more tech restrictions.

The White House has reportedly ordered the federal pension to halt investments in Chinese equities. The US has also tightened export controls to China and announced much more stringent additional restrictions on China’s Huawei.

The mood in the broader financial markets remained fragile. Concerns revolve around the possible consequences of easing lockdown restrictions globally. The markets are also monitoring China’s trade relations with the United States after President Donald Trump laying the lumber on the blame game.

The US has openly blamed China for the epidemic. A recent Pew survey conducted in March found that most Americans view China unfavourably, and China’s hawks in the US government are pushing for more financial sanctions and more tech restrictions. Which suggests China will remain in the crosshairs during the election run and probably beyond.

FX and GOLD markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp