I suspect markets will continue a two-pronged trade view in FX: to stay long USD vs vulnerable low-yielders where a dovish central bank is likely to keep rate divergence in play; and to stay positioned for the global recovery via only selective high beta FX funded out of EUR, CHF or JPY and avoiding the US dollar with the US yields set to move higher.

Higher yields and a stronger US dollar are entirely reasonable assumptions – the US economy is well on its way to digging itself out of the pandemic. Massive fiscal stimulus is now literally hitting doormats, and the signs are US President Biden has an enormous infrastructure plan for later this year.

Why wouldn’t yields rise?

Euro remains under pressure

EURUSD is still wilting around its lows for the year so far, with COVID-19 headlines and EU recovery fund concerns in play. Germany’s constitutional court has blocked Germany’s ratification of the Next Generation EU fund until it has considered a challenge to its constitutional legality.

And EURGBP has moved to a fresh year-to-date low this morning, echoing the continued divergence in COVID-19 related headlines.

The Malaysian Ringgit

The Ringgit improved off monthly lows after the government released better than expected trade data. With oil showing some signs of recovering from the EU lockdowns, it’s adding a modicum of support.

Bonds have sold off sharply. While stretched absolute yields could offer value to select “real “local money investors with lower liability hurdles, I still think foreign investors will remain wary as the easing cycle is over and should not be considered a reliable source of inflows.

I don’t have any news on the FTSE World Government Bond Index review, which will decide whether Malaysia will remain on the watch list. If MGS’s stay on the list, it shouldn’t rock the boat, but it will likely help the MYR a bit if removed. However, with the market turning into a better seller of bonds, any MYR bounce could be fleeting.

Thai Bhat remains supported

USDTHB remains bid with foreign investors reducing holdings of local bonds and stocks despite the effort to rekindle reopening plans by reducing days spent under quarantine requirements in some tourist provinces. Still, investors remain worried that another holiday season could turn to dust if the government doesn’t ease the tight and confusing COE (certificate or entry) requirements.

Gold suffers a double whammy

Of course, higher US yields are providing the sour eye-candy. Gold suffered the double whammy indignity amid quarter-end reallocation flows starting to come to market.

As US cash equities open, gold broke below the previous lows around $1720 amid quarter-end reallocation hit the market. The next support level is around $1700, then $1680.

Market analysis from Stephen Innes, Chief Global Market Strategist at Axi