While the vaccine throughput into the currency markets is more pronounced through the Emerging Markets FX channel, that lack of movement in G-10 FX is not overly surprising.
What does a vaccine mean for G10 FX?
My answer is not 100% obvious, but my lean is that it would benefit growth/commodities (CAD, NZD, and AUD) and eventually hurt funders (JPY and CHF) via the 2021 rates channel.
The net impact on the USD would be heterogenous around idiosyncratic growth stories. Given the lift to global growth, the USD’s net effect should be negative via the dollar smile, but performance would be highly assorted across pairs. It should also take the blot out the “Asia (Long Yuan) is the only game in town” trade.
FX ranges narrowing
Despite the positive Moderna vaccine news out this week, the market reaction was even more subdued than after the Pfizer vaccine news on Monday last week. Trading ranges in FX are narrowing, with EURUSD stuck between 1.18 and 1.19 with the street looking to fade the extremes.
GBP-USD is edging higher on trade talks optimism. While there is little new news (barring an optimistic article in The Sun newspaper), investors appear to be still assuming that UK/EU Brexit negotiations will prove prolific.
EUR-USD is modestly firmer despite Hungarian and Polish threats to veto the budget. Yesterday both countries voted against the EUR1.1tn budget, which requires all 27 member countries’ approval.
Still, the market is keen to hold long EURUSD positions this week. The Euro bulls are more attentive to the vaccine news and lower relative COVID -19 case counts vs. the US.
Malaysian ringgit on a winning streak
The Malaysian Ringgit looks to be heading for its 5th consecutive winning day riding the regional bullish sentiment wave from the RCEP traded deal and helped along by a favourable tailwind as oil prices rise with OPEC + considers postponing its plan to taper production.
And e earlier in the week, China delivered a twin boost of better – expected industrial data and a fresh injection of financial liquidity, which boosted local FX sentiment.
The US dollar downside is increasingly attractive vs. Emerging Markets FX. Within EM FX, currencies of economies that have suffered severe contractions in GDP this year due to COVID-19 and or the loss of tourism income are recovering admirably on the latest vaccine impulse.
And on that note, the Ringgit fits the bill on both accounts. Not to mention the much-anticipated release of AstraZeneca candidate efficacy and roll out, followed by the Chinese vaccine candidates (Sinopharm, Sinovac, CanSino) appear the most important for Asia should provide another booster shot in 2021 as almost all countries in the region, excluding the Philippines, Malaysia, and Taiwan have a deal with Astra-Zeneca.
On a similar trend, after China delivered a twin boost of better than expected industrial data and a fresh injection of financial liquidity, the Yuan has a picked up a massive head of steam this week, defying G-10 range trading proclivities.
The RMB complex is wearing the Yellow jersey in the short dollar trade peloton and is within an earshot of the critical 6.50 level trading just below 6.55 overnight. Most economic activity in China recovered further in October.
Assuming that COVID -19 remains under control, the V-shaped growth recovery on the mainland should continue in Q4, thanks to improving consumption – though the new lockdowns in Europe may act as a headwind for China’s exports. The impact from the signing of the RCEP trade accord might help cover some of those external trade blemishes.
Given China’s growth outperformance, a widening C/A surplus, a large potential global appetite for Chinese assets on the vaccine bounce, and greater policy comfort with a stronger RMB, the street sees much more value in selling USD/CNH.
Gold remains stagnant
Gold markets remain pretty stagnant, but the buy on dip mentality still prevails with US Fed Chair Powell and Vice Chair Clarida sticking to script this week. Both acknowledge the surge in coronavirus cases is a big concern for an economic recovery that still has a “long way to go,” and the economy will continue to need support from fiscal and monetary policy.
I do not have much of a salient view on gold these days as other assets are lighting up more distinctively for the eventual 2021 reflation lift-off that has lesser concerns about the fears of rising yields. And are less affected, but how long will the central banks be willing to honour their
current yield backstops in the face of a reflation torrent?
FX and Gold analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi