‘Risk on’ remains in fashion this morning, although it is not entirely clear what is prompting the ebullience. Comments from China’s officials suggesting purchases of US soybeans are continuing (Global Times) changed the trade war mood music considerably after yesterday’s Bloomberg report of a pause in Chinese imports of US agricultural products.

One thing to think about at the moment is the role of the CTAs. If there is a decisive shift in the technical picture, they are likely to emerge as the dominant force in markets.

The prospect of additional fiscal stimulus for Germany may have buoyed sentiment in Europe alongside progress on Lufthansa’s bailout. The “risk-on” mood is driving the US dollar weaker, extending the sell-off from mid-April markedly lower in the last few days.

US riots continue

Protests in the US and the possible military Humvees taking to the street of suburbia feature prominently in the media. The continued gains in US equity markets suggest this unrest is not yet impactful on US assets.

After all, if stock markets can survive the most profound economic calamity since the great depression, I am sure they can overcome the current level of civil unrest.

The technical break below support levels on the USD at the end of May has seen the sell-off accelerate. And this morning’s bubbly risk on mood suggests that markets are inclined to see the global economic glass as ‘half full’ rather than ‘half empty’ where it was sitting not so long ago.

Tide of optimism on re-openings

The recent risk-on tone and optimism that the tide is turning on the virus seems to be having the most significant impact on the US dollar rather than stocks this week. As the world re-opens, economies are performing better than expected by early economic indications triggering unbridled demand for currencies.

The markets have underestimated the power of this SPX rally, and as such most did not forecast the strength of the USD sell-off against AUD. While everything else is all one big correlated blob where Forex looks like it is leading much of the time this week, the main driver of the different returns between assets is their relative betas.

Hard to argue the path of least resistance for the USD is down, but current levels are particularly challenging entry points even for the most ardent USD bear.

Australian Dollar continues to climb

The market’s primary ‘risk-on’ barometer, the Australian dollar, continues to flash green. The surge in global equities alone would have boosted the Aussie sentiment, given its high beta.

But it was also supported by the outcome of the Reserve Bank of Australia (RBA) meeting where the policy was left unchanged and, perhaps more significantly, the RBA opted not to talk down the AUD, even though it was up 5.2% on a trade-weighted basis since the Board last convened on May 5.

Consumer confidence continues to bounce back, China optimism is helping, and the bounce in Iron ore prices due to China’s demand and mine lockdowns in Brazil provides the cherry on top.

Euro trades higher

The EUR popped higher overnight against the back-peddling US dollar as markets contemplate extra stimulus on the continent.

Germany’s Chancellor Merkel will meet with coalition officials today to discuss a further fiscal stimulus of between EUR50-100bn. The EUR is favourably blitzed on all sides by talk of the stimulus.

The European Central Bank (ECB) looks likely to increase its bond-buying program by EUR500bn at its meeting on Thursday, while the EU this month will negotiate on the details of the EUR750bn recovery fund.

The Pound attempting to move higher?

Cable continues to move back towards April high watermark, and critical resistance of 1.2650 spurred on by a combination of risk on and more favourable mood music on the Brexit as compromise is in the air.

New reports say the EU’s chief Brexit negotiator has told EU ambassadors that his UK counterpart, David Frost, wants to show progress in the next few weeks to demonstrate that a deal can be done this year.

Therefore, the report suggests the UK will compromise first, allowing the EU to compromise in turn. This suggestion of flexibility is somewhat at odds with the rhetoric over the weekend, with each side blaming the other for the lack of progress. A new round of negotiations begins today.

Malaysian Ringgit gets support from oil prices

The ringgit is trading favourably on the back of the broadly weaker US dollar and surging oil prices. The impact of higher oil prices is leaving a profound effect on high-yielding and commodity-producing currencies.

Although the MYR is not considered a high yielder per se, the MGS 10-year note is still near 3 % and quite attractive from a hunt for yield perspective even more so against the backdrop of a weakening US dollar.

Persistent declines in implied US equity and rates volatility against the backdrop of higher oil prices are having a robust and sturdy effect on the ringgit.

Gold struggles as stocks rise

Gold is struggling as equities continue to trade well. A decisive shift towards ‘risk-on’ investment demand beginning in late Asia trading, moving through Europe and into US action, triggered a notable correction in gold.

The USD was sharply lower and global equities higher, notably European and US equities.

A slew of positive – or potentially positive, re-opening narratives – developments spelt lower prices for gold.

The USD was also sharply lower. Normally this would weaken gold, but not in this case. Gold and the USD have both been subject to investor demand as safe havens and have tended to rally together this year.

Lockdown easing across the world and more unified stimulus from Europe were seen as positive for financial markets but negative for gold.

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