Gold pushes higher as risk-off sentiment increases. The mood in the broader financial markets remained frail. Concerns revolve around the possible consequences of easing lockdown restrictions globally. The markets are also monitoring China’s trade relations with the United States and Australia.

But the primary catalyst for gold overnight was US Fed Chairman Jerome Powell, who stated in non-ambiguous terms there will not be a V-shape recovery, implying more stimulus in the offing but not of the monetary policy variety.

Although he did not say anything that we did not already know, gold investors liked having this made evident “Liquidity problems turn into solvency problems.” Implying that defaults and bankruptcies could come in weeks not months and the stock markets exuberance of 21x forward P/E will be exposed sooner than expected.

The move on gold should be viewed as a hedge on stocks, not on increased expectations of the Fed joining team sub-zero (negative interest rates). So as the SPX recovers as so apt to do gold could struggle to reach higher if risk sentiment returns.

But I also think traders have no option but to defend the risk of the Fed moving below the LBZ so gold will remain firmly bid on a dip.

It is hard to determine the impact on gold based on inflation data, which showed a further slowdown in global inflation. China’s consumer-price index for April rose 3.3% y-o-y, according to official data. This was lower than the 3.6% that a survey of Chinese economists had predicted and down from 5.4% in January. US April headline CPI fell -0.8% m-o-m, matching expectations.

Low inflation is ostensibly gold-bearish, but deflation may prompt a higher degree of monetary accommodation, which is gold-positive, but Powell did throw ice water on negative rates.

Currency Markets: US Dollar’s modest gains

It is one of those bizarre trades when you think about it. What is terrible for the US economy is excellent for the US dollar. The Greenback rose modestly overnight after Chairman Powell delivered remarks suggesting the US economy will be in for a prolonged period of weak growth.

But the dollar nudged up after Powell downplayed the prospects of US negative rates.

Risk sentiment remains fragile. US stocks sold off hard again overnight, while fixed income remains bid. The US dollar has been relatively resilient despite some fed fund futures trading in negative territory, suggesting haven demand remains keen for the Greenback in the gnarly for risk environment.

The Australian Dollar

The Australian dollar sold off on its high beta correlation to US stocks given that the bulk of Australia’s pension fund assets are held overseas. But what should be of interest to the Aussie bulls today is that Iron-ore export volumes to China from Australia’s Port Hedland are up 11%yoy in April. More evidence that mining activity is benefiting as China activity rebounds. That is an essential positive for Australian trade amid disputes over beef and barley.

The Chinese Yuan

As far as the regional bellwether Yuan, the CNH retreated for a fourth day as geopolitical spat with the US endures, putting at risk the “phase one” trade deal.

A lot of traders are hedging against U.S.-China relations to turn worse before the November election, although Yuan may still appreciate in 4Q if China data support. So, it is far from a transparent and clear-cut trade at this juncture.

But weighing on near-term sentiment is the word on the street that China may propose extending the implementation period of phase one trade accord due to the massive drop in domestic demand for all products as a result of the virus knockdown.

The Malaysian Ringgit

The Ringgit is trading more balances with oil steadying and a better than expected 1 Q GDP print, although the latter is unlikely to endure. So, without a significant recovery in oil demand and prices to subsequently pop higher.

The Ringgit will struggle to pivot bullish, although arguably, the local unit is on much better footings than only a week ago. The next test for the Ringgit will be tomorrow’s China retail sales and industrial data prints, which could give some indication to Malaysia’s economy and the rest of the world, what economic life looks like immediately post lockdown.

Negative rates

There seems to be some suggestion by analysts or media that with Powell, “nipping negative rates in the bud” somehow reduced the chances of the Fed joining team sub-zero. But of course, from a trader’s perspective, we know that Powell can say whatever he wants, repeat evidence shows Fed guidance expires worthless within a week or even shorter. Its the market pricing that drives Fed policy, not the other way around.

The talk about negative rates continues. And although Fed members continue to push back against the idea, flows in the 100+ strike calls in Eurodollar continue, as trader and risk rates desks at banks are forced to hedge against the risks.

Another take for earlier in the week for Cleveland Fed President Mester said she did not think it was a go-to tool. There was a consensus at the central bank before the coronavirus that negative rates would not work well in the US, however – and this is the crucial point – she said that she did not know that any tool is off the table.

But given the Fed’s never-ending desire to ratify market expectations, I would guess negative rate market pricing will eventually test the credibility of the current “we don’t want negative rates” mantra.

For this reason, no matter what the Fed says, I would not be short the 100+ calls in the Eurodollar options markets because that causality probably runs from the market to the Fed, not the Fed to the market.

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