Last week’s sudden shift in Euro sentiment was due to the confluence of continental dilemmas that piled on the pressure. Be it Italy’s political meltdown or the European Central Bank’s (ECB) FX deflationary concerns, it made for a for few “Nervous Neelie” moments as stop loses cascaded in the overly subscribed consensus trade of the year.
Still compounding matters is the US economy which looks set to outperform Europe as global growth “de-synchronisation” via the Biden stimulus” effect takes hold.
We spent much of last year, following the trials and tribulations of COVID-19, with core yield curves flipping from either bull steepening (as the markets priced in the monetary policy response), or then of late bear steepening (as the fiscal pressures came more into focus) but thanks to the US FED policy, interest rates volatility remained significantly suppressed.
Since the beginning of this year, the most significant global macro pivot has been repricing US rates higher post the Georgia runoffs. And while the shift in market regime does not necessarily preclude further USD/Asia dollar downside intuitively, the narrowing of yield differential between the USD and Asia FX will create a more potent FX pushback where now the structural narratives like the continuation in the repricing of the China flow fundamentals will need to do more of the heavy lifting.
What could force the market to pivot buying USDASIA is if a repricing of short-ended US interest rates as the market starts to price infeed cycle compression as the vaccine rollout and fiscal stimulus narratives evolve.
Gold remains on the defensive
Gold continues to lose traction on the back of the stronger US dollar as both shrugs off a dip in yields and remain non-reactive to US Fed Chair Powell’s dovish forward guidance or even the political discord on both sides of the pond.
However, I think it’s worth keeping an eye on these developments, especially if social unrest rears its ugly head in the US.
But its gold’s old foe, the USD which is applying downward pressure on gold. The US Dollar Index (DXY) closed at 90.77, the highest since Dec. 21 (with gold closing at 1,876/oz that day.
However, as US bond yields get repriced higher, it will limit gold’s rise over the short term, so the street has already morphed into a seller on rallies.
Treasury yields are far too low. A bond yield of 1.50% on the US 10-y should quite easily be possible and likely pose a big gold problem.
Barring the Fed easing into the recovery, it’s now unlikely gold will exceed 2020 highs. And with growth returning to trend as vaccines get rolled out, policy expectation will increase, and gold could now close out the year between $1650 and $1750 assuming herd immunity is attainable.
FX and Gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi