Different day same story as US stocks climbed the ladder on enthusiasm and idealism that lawmakers will come to terms on a new economic stimulus package.

The S&P 500 was pushed to the cusp of cleaning the slate and wiping off the entirety of year’s losses. Gold extended gains amid speculation interest rates will stay low for longer and the US Fed is expected to put up little fuss about inflation rising.

Better jobless claims helped the mood music still 10-year yields slipped 1bp to 0.53% sending gold up a bit, but oil traded down decoupling from its higher beta to equity markets this week.

There is still no breakthrough on US stimulus talks between Republicans and Democrats. Always, in an election year, it is crazy to think that politicians will take a fabulously frugal approach as penniless parenting is rampant across the nation given the services sector beat down and loss of jobs due to Covid-19.

Indeed, this isn’t about buying gasoline for the family sedan. This about feeding your kids!

Non-Farm Payrolls in focus

Well, we should expect some position squaring ahead of the Non-farm payrolls (NFP), but after the forecasting error exposed in the data gathering which caused revisions to the ADP reports to the magnitude of 2 million, I expect that the data will be less trusted encouraging markets to default back to trend analysis.

But gone are the days when a strong NFP report made for a bullish US dollar day as the Fed cares little about positive economic prints as they will surely not change the Fed funds outlook any time soon.

This is an environment where nothing goes down except apparently the dollar.

In these baffling pretzel logic confusing times, FX traders will follow one train of reasoning as the dollar will continue to revert to its counter cycle trend, the buck turns sour when the goings are good, and the buck turns sweet when the goings are bad.

But this gnawing FX toothache means I still think that view seems far too quaint in its simplicity as at some point growth differentials and the data will count.

Low yields forever are the ultimate invitation to strap on risk as consensus works off the theme “do not fight the Fed.” Equities, even at these elevated levels, continue to climb the ladder; gold similarly continues to power ahead; the USD is on a clear-cut weakening trend.

Emerging markets currencies

The Covid-19 shock is reshaping the Emerging Markets (EM) landscape dramatically with current account deficits turning to surplus in many places as sharp declines in economic activity cause imports to compress.

USD/EM pairs shot higher again following the USDTRY lead as recent pressure on the Turkish lira extended further overnight, with the currency falling 3.6% against USD to a record low.

Turkey’s macro imbalances are coming to the fore as FX reserves are depleted, offshore flows missing, tourism revenues at all-time lows and price pressure a severe concern as global supply chains remain in tatters.

Asia FX

It’s been a stellar week for the Malaysian ringgit as a confluence of positives has combined to send the local unit on its longest winning streak since January. The favourable interest rate differentials between the USD and MYR are melding with encouraging regional growth outlook driven by China’s firing on all cylinders economic engine. At the same time, the favourable ringgit sentiment is getting enveloped by stable to higher oil prices again this week.

I would expect traders to take their foot off the accelerator today ahead of tonight’s NFP while taking a cautious approach to currency risk forward of the August 15 US-China trade discussions.

G-10 currencies

EUR/USD is proving choppy near recent highs as it balances better economic data against poor COVID-19 data.

Signals about the health of US labour market conditions should be a key focus for the FX market, but after spending 20+ years in the currency hot seat, I’m not sure what matters anymore other than to stick to bearish dollar view.

The longer-term dollar outlook is getting well defined while staring down the double barrels of the US duelling deficits.

Gold rises further

Make no mistake; this is not a gold fevered or emotional fear of missing out the market; much to the contrary, this is a highly sophisticated market that is modelled tangentially to the pulse of US real yields.

Even with better economic data and US equities that continue to power ahead, gold continues to take its cue and climb the ladder based on lower US yields as the Fed’s lower for longer mantra coupled with a strong likelihood of the introduction of some form of inflation targeting continues to resonate in all gold circles. This suggests the market remains on course for testing the absolute inflation factoring gold highs of $2800/ oz at some point in 2021.

Why?

I’ve been involved in trading gold for a very long time, and I honestly couldn’t tell you where gold will trade next week or tomorrow. But it’s the clear correlations to 2008 and the ensuing gold stimulus-driven rally through 2009-2011 that has so many parallels to what is happening today.

Look, there is never a wrong time to take profits, but even as gold has been making new all-time highs and the metal is up about 70% over the past 2-3 years. Sure, this might sound rich, but it’s worth keeping in mind that a similar rally from 2009 to 2011 continued up to +120%.

But don’t discount gold junior brother “silver” as that is also mapping correctly to 2008 GFC stimulus inspired rally of 2009-11 only in a much more compressed fashion.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp