As expected, US Fed Chair Powell was careful to stay dovish echoing the sombre tone struck by the Fedâ€™s other essential voices pushing back on any talk of taper just yet while sounding less prosaic about the US economy than the likes of Raphael Bostic.
And while the street shows a lot of respect for the US stimulus’s hyperinflationary impulses, Powell continued to emphasize the path ahead is far less from certain given the nature of the pandemic and the recovery. Hence, he continues to remind the street even a minor policy shift from the Fed is unjustified at this moment.
However, I think the FX market has found a comfort level in the “Clarida Rule” which says “We are not going to lift off until we get inflation at 2% for a year. We are trying to tie our hands. We are saying we are not going to hike until we get to 2%.”
Euro trades on the softer side
EURUSD continues to trade on the softer side relative to G-5 peers. It’s interesting to see the street apply some short US dollar differentiation in the areas where the path is more stimulus-specific.
Higher beta currencies perform better – notably CAD, which makes sense as it should benefit from exposure to a fiscal push in the US via cross border trade and engineering dynamics.
The lack of broad US dollar strength suggests that you could make some argument that the short squeeze might be over, and flows herein might be risk adding with the high growth betas leading the charge., After all, the US dollar can still underperform in the current environment, with twin deficits a key driver.
The Malaysian ringgit, as will all oil sensitive currencies, should trade favourable on the infrastructure commodity boosting element of the US stimulus package despite fears over the domestic growth outlook due to the resurgence of COVID.
Also, Chinaâ€™s steady economic rebound resonates for key regional trading patterns were Malaysia does stand out.
Gold remains under pressure
US fiscal stimulus news out overnight should be a positive for gold, though the reaction late in the US session yesterday and in Asia today seemed to be negative at first.
Gold still seems to be trying to form a base around $1840-1820, while hovering at the 200dma. But I suspect investors will need to see a clear break above $1867 again to commit to longs via the US stimulus package impulse. The has been a fair amount of selling over the past two to three days as investors continue to fret over rising US yields.
FX and Gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi