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Most 2021 currency market views were based on the 2020 rates analogue where break evens and real rates moved opposite directions.

However, this wasn’t the case until the FOMC pushback overnight. The current nominal rates increase was driven by both components moving up due to markets pricing higher inflation alongside higher policy rates.

So, this s could still be a huge risk to the view if inflation does pick and the market starts to price in a policy pivot and buy US dollars in earnest instead of trimming extended dollar short.

In some cases, the US dollar pullback has allowed some of the “risk-on” FX plays to flourish also buoyed by local news. The AUD, NZD, NOK and CAD are all stronger.

With the USD no longer acting as a headwind, currencies have capitalised on some gains in commodities, notably in oil prices that extended their gains materially.

The RMB may have also aided Asia FX gains. The overall narrative hasn’t changed much as the Mainland continues to lead the growth differential pack.

However, we know the People’s Bank of China’s (PBoC) invisible hand is in the background and may slow appreciation. Still, it might be increasingly hard to push back on market dynamics if Fed Chair Powell opens the dovish door or a weaker US CPI print does the heavy lifting.

After initially buckling at the knees on the declared COVID state of emergency in Malaysia, the Ringgit had taken a decidedly positive turn on both the recent FOMC taper push back and gains in commodity prices most notably for the ringgit concerns higher oil prices.

The general fade play here is that lockdowns are being viewed a speed bump. Provided vaccine efficacy remains high during the worldwide rollout. FX traders will still buy into currency weakness in Asia. There is no convincing reason to turn full throttle bearish on the ringgit (or ASEAN currencies) other than the lockdowns whilst the global reflation trade still fires.

With most G-5 traders jobbing momentum plays and since USD has come a long way to start the year, the set-up into a soft US CPI print (Jan. 13) and Fed Chair Powell’s speech on Thursday may provide the impetus for the US dollar to head much lower again.

Gold shines a little

Gold is trading up this morning as the US dollar weakens after FOMC members pushed back on the markets taper talk, allowing risk assets to breathe more freely and support Gold via lower US yields.

Published by Stephen Innes, Chief Global Market Strategist at Axi