It was a poor start to the week in terms of risk sentiment, with no catalysts for fresh positivity on the US-China relationship.

The US dollar has been reasonably resilient despite some fed fund futures trading in negative territory. Seasonality favours the USD this month, with the 10y average performance in May for DXY +2.26% – by far its best month of the year.

Risk traded poorly overnight and equities continued to slide amid concerns of a renewed virus spread While Dr Fauci provided the coup de gras as he’s in favour of maintaining US lockdowns. This should favour defensive currency strategies and ultimately the USD.

Pressure on the Australian Dollar

At first blush, in London hours, the reversal higher in the AUD was pretty much incomprehensible to me. The narrative is getting worse as China singles out various Australian exports to make a political statement.

But the Australian dollar came back to the reality of sorts in the New York session but not because of Australia -China risk, but because of the AUD beta to US equity markets, as US stocks tanked on reopening concerns.

Euro finds support

The GCC finally activated its ‘nuclear option’ of ruling European Central Bank (ECB) action unconstitutional, something that many in Germany had hoped could be avoided.

But since it’s more focused on procedural rather than substantive issues, it leaves the door ajar to amend the situation, at least for the PSPP.

And with virtually no political appetite in Germany to question its membership in the union, which is critical, and suggests there could be some unified pushback that the GCC might have underestimated. So the Euro has found support above 1.08.

But the Euro moved higher overnight on the back of reliable seven-year auction in German bonds on Tuesday. The issue was better bid in the grey market throughout the morning – the bond appeared to be cheap on the German curve pre-auction.

Malaysian Ringgit may struggle to get traction

With risk trading poorly in the US markets and oil prices falling, the Ringgit will struggle for traction, but weakness should remain capped as local sentiment will stay tethered to PBoC policy, which could ramp up considerably in May. Still the fear of secondary virus outbreaks and Australia -China tensions will continue to sully the near-term regional landscape.

The Thai Baht

After the Thai Baht’s May seasonal down-move failed to materialise, the THB has been recovering as parts of the economy are reopening. But a large part of the outperformance comes from positioning. With the market caught long USDTHB from late April into May, traders are reducing exposures rather than leaning into a straight-up THB preference.

Gold prices lift

Gold received a lift from Fed policy member Robert Kaplan who suggested more fiscal stimulus was needed.

But gold continues trading just above $1700 as the US dollar and real rates are consolidating around recent levels. Despite the muted price action, all the bank analysts remain very bullish gold.

But absent catalysts and based on price action, it looks like strategic investors are holding existing core positions rather than adding more weight to the inventory as the trading pads are littered with intraday day and fast money types.

With the central banks around the world are pumping in liquidity, if not printing money outright, as political leaders keep topping up fiscal stimulus programs, why isn’t gold higher?

The impulse from a sharply deteriorating labour market will be disinflationary for now and should hold the gold bulls at bay, and it too could cause distressed sales if lockdowns extend.

But Fed monetary policy could reset lower in June if lockdown broadens, which will be bullish for gold.

That said, negative real rates are likely to remain in place for years and have much room to fall further from current levels, as deflation swings to inflation, which will continue to benefit gold over the longer term.

Plus, the defaults and bankruptcies will come in a few months, and the stock markets exuberance of 21x forward P/E will be exposed.

FX & GOLD markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp