Gold shines as President Trump pokes US-China hornet’s nest again

President Trump poking the US-China hornet’s nest again amid the backdrop of unprecedented central bank easing provided a spark to ignite gold prices higher.

And with US Fed Chair Powell hitting the market square between the eyes suggesting the FOMC are extremely worried about the risks of corporate failure and associated permanent job losses, gold investors were all ears.

The US administration’s ongoing criticism of China over COVID-19 will be a staple on gold investors’ diet in the lead up to the US election and should provide a positive and lasting backdrop for gold prices into year-end.

While Fed Chair walked down, the markets lean into negative Fed fund rates this week. However, negative real rates are likely to remain in place and have room to fall further from current levels, maintaining a supportive scrim for gold.

And a further weakening in economic data, global policy easing, and declines in real rates should pave the path higher with golden bricks.

The significant rebound in oil prices and the analogous implication on inflation expectations for real interest rates have likely also helped push gold higher.

Currency Markets

President Trump’s newfound love for the US Dollar? Say what??

Taking to the election soapbox with the SPX trading 200 points south of 3000 and looking for something favourable to chest bump. President Trump has apparently pivoted and is now embracing a strong dollar. “It’s a great time to have a strong dollar … Everybody wants to be in the dollar because we kept it strong. I kept it strong,” Trump said.

Traders initially flocked the greenback before common sense took over, writing Trump’s grandstanding off to election brinkmanship. And if you think the Fed forward guidance expires worthless within a week. President Trump’s rah-rah effect on the dollar should expire, and it did, within minutes, especially if it is from the supportive side. The White House wants the dollar weaker.

The US dollar retreated from a two-week high as stocks rebounded on the back of higher oil prices, triggering a resurgence in the commodity bloc led by the Canadian dollar. While the Yen lagged as demand for currency havens ebbed and gave way to glittering gold appeal.

Australian Dollar gets support from rising oil prices

The Australian dollar came back with a vengeance after getting knocked down when a gnarly domestic jobs report showed employment plunged to a record low in April.

Higher oil prices supported the Aussie overnight with industrial commodities in tow. While US stocks lifted as did gold and this curious correlation also helped to boost the A$ fortunes.

The Chinese Yuan

The Yuan halted a four-day slide as profit-taking set ahead of this morning’s critical China economic data, which could offer up some positive surprise. But with US-China tension still lingering ominously, the USDCNH is not about to make an aggressive tack for 7.05 anytime soon. The Yuan moves look more or less tied to the broader direction of the USD overnight.

The Malaysian Ringgit

Higher oil prices will be greeted favourably by the Ringgit this morning as the market seems to be putting the doom and gloom oil market expectation in the rear mirror thanks to OPEC+ compliance and a quick rebound in gasoline consumption globally.

Sentiment could pivot even more favourably on a robust read on China’s retail sales report due out later this morning.

Looking forward

USD

Powell ruled out negative rates “for now,” leaving the door wide open for the market to price in whatever it wants to price in. This will be an interesting story going forward.

AUD

I believe we are at diminishing returns from China-negative comments as the market becomes desensitised to President Trump’s bluster.

The question now is whether this stops at a pillow fight or do they bring out the boxing gloves. For now, further losses in AUD will require a US stock market capitulation or worsening data out of China.

EUR

Traders are probably getting tired of getting no joy chasing the Euro lower as EURUSD is very sticky below 1.08. It still feels to me like we are in a 1.0730/1.1030 range for EURUSD until the EU economy pivots higher. And on that call, your guess is as good as mine.

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