Gold rebounded convincingly as risk-off sentient continues to dog the markets this week, suggesting the pandemic inspired investor demand remains alive and well to guard against the unexpected as market pivots to season factors like the June swoon and to the summer doldrums of July when liquidity for all market becomes a primary concern.

Indeed, the dog days of summer will give cause for thought to load up on some gold.

Currency markets focus on the Fed

It isn’t easy to make heads or tales of the currency markets ahead of the US Fed meeting, but I think it has more to do with the fact we have finally filled the Covid-19 risk-off gap while other seasonal factors like the June swoon are chipping away at the ” risk-on” dominance of Forex.

The upward momentum in risk appetite faltered yesterday, prompting substantial weakness in currencies such as the AUD, NZD, NOK and CAD. There was no apparent fundamental catalyst for the reversal other than the possibility the S&P500 completed its round trip on Monday, reversing all the losses seen earlier in the year, which may have prompted some profit-taking.

The astonishing round trip recovery in US equity markets may have shone a light on the time mismatch between the market’s forward-looking pricing structure and how the real economy is currently performing. Or the vigorous mood on “Wall Street” but the still distressed reality on “Main Street.”

But it was a day of reversal, and surprisingly it is taken this long, but probably a testament to the impressive amounts of the dollar funding the Feds have doled out to the FX markets.

There is a detectable level of FX markets uncertainly that started to fill the interbank chat lines yesterday. While risk seems to be the dominant narrative, traders are beginning to question that conviction and are starting to guard against falling into USD bear trap.

With that in mind, we will probably see traders take on a greater proclivity to play FX crosses than test the fickle nature of risk sentiment. For example, CHF-JPY to move lower, having reached stretched YTD levels. AUD-NZD could now stand to move lower as NZD’s recent underperformance stands at odds with the economic reopening.

Overnight action

The greenback was mixed overnight, falling against the EUR, and holding on to some gains against commodity-linked pairs.

Buying on dips on the EUR

On the Euro, it looks like there is some general USD weakness again in New York, similar to Monday. EURUSD held in on this consolidation dip after what looked like profit-taking across multiple asset classes. The theme seems to be EUR buying on dips with the stimulus package and reopening of economies.

Malaysian Ringgit held hostage to oil volatility

The Ringgit is getting held hostage to the volatility in the Oil market. Unfortunately, the volatility has been pointing to the downside as Oil traders’ frets over the macro landscape as the US inventory reports suggest US demand continues to wane.

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