The strange combination of higher stocks and the higher dollar has led to a lot of head-scratching. It is an odd scene these days to see the US dollar higher in such a risk-parity amorous environment.
But the higher-level of US vaccinations may be behind the dollar appreciation. The yawning distribution gap between the US and EU tips the immediate growth differentials in the US dollar favour in a humungous way.
And as money flows out of Asia on concerns about China tightening, perhaps it flows to the places that had successfully vaccinated the most citizens. (USD and GBP).
Euro remains under pressure
EURUSD was still for sale into the New York Close, a continuation of last week’s narrative.
But some newly minted shorts ran for cover after former European Central Bank (ECB) chief Mario Draghi is reportedly the frontrunner to serve as the next Italian PM which is exceptionally positive from diminishing political risk premiums perspective. But is it enough to change the selling onslaught?
I caution making much of a meal out of market moves into the Grey Zone where liquidity is thin between the New York close and when Singapore eFX engines fire up, but Draghi is the market wizard and a political force to be reckoned with.
Still, after having broken a series of lows near 1.2050, the pair has failed to reclaim that level as the market now sets sights on the possible real position trap-door of 1.2000 from which the pair broke higher in a big way in December.
Aussie dollar weaker after RBA announcement
The AUD is somewhat weaker after the Reserve Bank of Australia (RBA) surprised markets with an announcement that its QE programme would be extended.
The FX reaction was not huge, most likely because an extension to QE always looked likely and this announcement just arrived a bit early. Still, there was no doubting the dovish intent of the accompanying statement.
The determination of the RBA and other central banks to push back on tapering expectations suggest rate differentials are unlikely to have much impact on FX for now.
But with US stimulus packing likely to be bigger than expected, in an orthodox world massive stimulus creates inflation and typically causes the Fed to react. But it’s not the Fed that tells the market what to do. Instead, the market reveals to the Fed what they should do.
More efficient vaccine rollout and a tremendous stimulus impulse should bring taper talkback into focus.
Malaysian Ringgit struggles for momentum
The ringgit struggles for momentum on the back of a surging US dollar despite higher oil prices and improving global risk sentiment. Its possible investors are pivoting out of Asia due to China rate hike fears and diving in the US stocks where the vaccine rollout appears to be accelerating to full bore. So, traders will be keeping close tabs on capital markets outflow data this week.
Gold losses some shine
The retail buying bonanza is fading, the US dollar surging on the back of linear momentum on US vaccination roll-out and massive demand for US stocks.
As a result, gold has fallen out of favour but still holds well above $1825 support channel thanks to the Fed’s putting and hopes for an inflationary impulse on the back of the US stimulus deluge.
FX and Gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi