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With stocks, commodities, real estate, crypto, arts, collectables all participating in this rally, this global asset reflation is as much about liquidity as it is about activity normalization.

But fiscal + monetary stimulus, high savings rates, have created the perfect conditions for speculation and asset price lift-off, and this is about as calm and forceful a market rally gets.

And when adding the benefits that investors will no longer be held hostage to the previous White House collective confusion on domestic and external policy, it is no wonder why “The Street” is still popping the New Year champaign corks basking in the afterglow of the rally party which is looking to extend and as we progress into 2021.

But as we approach Q2 to keep an eye on the US Federal Reserve as the monetary signal will start to shift. And be mindful that as the economy reopens on the back of broader vaccine distribution, a normalisation in consumption of goods and services will take away from savings and stimulus that are currently being used to buy financial and real assets as these inputs will provide only a front-loaded effect.

That is not to say that the business cycle will end as we could very well be in just the early stages of a glorious new age of renewable and technology transformation. As we approach the second half of the year, prepare for the music pause. Covid-19 normalisation won’t be as much a full-stop normalisation.

The market has been steadily pricing for a while now what the economic data will eventually show in the back half.

Sentiment turning on the US dollar?

I suspect there will be some carnage as short US dollar positions if there is a bigger buy-in that US economy will recover quicker than Europe, particularly as Joe Biden aggressively pushes vaccination efforts and will achieve herd immunity faster than expected.

Indeed, the negative US dollar narrative on the back of additional stimulus seems to have run its course. With US yields outperforming and the hefty short USD positioning, the risk of a squeeze could be on the cards, as the positive momentum in EURUSD has faded a bit during the last 48 hrs.

The vagueness in the US Fed minutes is by design as the Fed is thinking about the taper. The juiced boost combination of stimuli and vaccine impulses will push inflation too high for their likings and could warrant some push back response from the Fed.

On the Yuan

Yesterday after the market close, the People’s Bank of China and the State Administration of Foreign Exchange announced that China would revise the macro-prudential adjustment parameter for Chinese companies’ cross-border borrowing from 1.25 to 1.

The MPA parameter is a multiplier that is part of an equation deciding the upper limit of outstanding cross-border financing a company is permitted. This move indirectly reduces capital inflows and is likely to keep USDCNH supported.

It’s the second decision made by Chinese regulators this week to reduce net capital inflows and indirectly discourage any further sharp rally in CNH.

I suspect that the PBoC is comfortable with a stronger yuan, especially that officials are promoting RMB globalisation. The ‘dual circulation’ strategy is the theme this year.

So, the impact of a stronger currency on exports has been less of a concern so far.

However, what makes the central bank uncomfortable is the pace of RMB appreciation. A sharp movement in either direction is the last thing Chinese regulators want to see. So, I think spot FX is likely to remain range-bound around current levels in the short term.

But with China’s fundamentals still favouring its currency, I expect CNH to keep strengthening in the mid-to-long term, though at a slower pace with lower volatility.

Oil had a bit of an early hiccup

Oil had a bit of an early hiccup Shijiazhuang, the capital city of Hebei Province (near Beijing) has been locked down after more than 50 new COVID cases were reported yesterday.

This is the highest daily figure for months in China. This new restriction has placed more than 10 million people under lockdown. China’s health authorities are expecting the number of new cases to rise.

The central and local governments have been quick to respond to this latest outbreak, but the situation warrants monitoring in the coming days. Any further developments could impact market sentiment.

However, if we do not have definitive news that vaccines will not work against variants, traders will buy the Oil market dips knowing the vaccinations are our only way out of COVID abyss in 2021.

International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi