US and European equities were a little stronger overnight and the EURUSD rose to an 18-month high after EU leaders agreed on details for an EU Recovery Fund.
The eleventh-hour deal unambiguously removes a huge political tail risk. What matters the most for FX markets is that traders perceive the European Central Bank (ECB) backstop to be unwavering and that European break-up risk is mute.
A deal unequivocally does both, and this is where the Euro has room to surge as political policy discord has been at the heart of the single currency embracement since day one.
But what is most significant for stock market sentiment is if investors believe the EU recovery fund, which is the EU’s first universal counter cyclic instrument, will be large enough to cover the enormity of the COVID-19 crisis while amplifying growth and investment opportunities.
On first blush, the market thinks the agreement is a fair-minded attempt to assuage all of those conditions.
As for the S&P 500, it has wholly lost its economic beta in favour of the vaccine and the wall of money argument backstopped by governments who will do what it will take to see “Main Street” through this gnarly virus and at the same time central banks will monetise all that debt.
Forex: US Dollar
The stock market is exciting, but the monetisation proxies are exploding higher and with EU Summit finally over, the market is turning the focus to the July 29 FOMC meeting.
Recent speeches and statements give traders the impression that the Fed is itching to do something again, just four months since their record interventions in March.
US Fed keen to keep the pedal to the metal
The FOMC’s appetite to keep the pedal to the metal is staunch. Whether this means an imminent announcement of more formalised and aggressive forward guidance is hard to say. But one thing that I feel safe to say is that USD longs should be a lot more panicky than USD shorts.
The markets continue to have visions of Fed Chair Powell peeking around the curtain, just eager to rush the FOMC stage with money bags in tow.
Metals are officially exploding to the topside, thanks to the vaccine news. The AUDUSD is breaking out by reason. There has been a pervasive rally in AUDUSD with the pair breaking the June 8 high of 0.7063 rarefied territories not seen since April 2019 when the high was 0.7206.
The positive risk tone helps, but RBA Governor Lowe’s speech was a clear catalyst for no other reason than he highlighted the hurdle to ease monetary policy further remains quite high, at least for now. AUDUSD can quickly test the 0.72 level given the lack of technical resistance, supportive risk environment, and relatively hawkish central bank.
Euro trades higher on rescue plan deal
A “risk-on” mood is evident across much of the FX market this morning on strong equity markets and an EU recovery fund agreement. Even before the overnight resolution among Europe’s leaders, the mood in equity markets was buoyant on the vaccine news, but notably in the tech-heavy NASDAQ.
Success in Europe added to the tone, and while the Euro was slow to play catch up, it was just a matter of time before profit-taking subsides, and the EURUSD did explode higher.
USDAsia pairs are drifting lower after the EU recovery fund deal announcement with mostly USD sellers in evidence. Even the outliers – USDTHB and USDIDR – joined the move, which clearly illustrates how turned off traders are now for holding long US dollar positions.
The Malaysian Ringgit
I would expect the ringgit to remain supported against a weaker USD’s backdrop and stable Oil prices. However, a word of caution is that the market is far more uncertain about oil market recovery than their unambiguous view for a weaker US dollar. But with oil likely to range trade throughout the summer, ultimately, it’s the fate of the USD dollar, not oil prices that will steer the ringgit ship.
Still, the global risk markets remain supported, and China recovery is on track, all of which should carry the day for the favourable ringgit sentiment.
Gold shines again
I am not sure why we gapped at the Comex night session open other than to suggest some sniper wanted to run some topside stops in low liquidity conditions as there were no clear headlines to support the move.
Gold hit 9-year high on fiscal stimulus, COVID-19 count, and a falling US dollar. The uptrend is firmly entrenched so the rally can continue.
Gold markets continue to receive its jet fuel from two critical ingredients: government debt and central bank liquidity.
Indeed, it is all about those negative real rates, and with the Fed likely to keep the pedal to the metal on stimulus, yields could go even lower.
On the US government stimulus front, negotiations are ongoing. Still, whatever the outcome will be positive gold markets, as even more enormous government debt and additional spending, will likely be the result.
A redoubtable combination of growth-linked commodities (copper & oil) rising, S&P higher, USD lower, and with more stimulus on the way to ensure that the economic lift-off will not fail to launch, my 2021 target of USD 2,000/oz is within reach.
XAGUSD has traded up to 22.41, following an earlier move to 22.08 from 21.30 on that same potent combination of growth-linked commodities (copper & oil) higher S&P and lower US dollar.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp