Asia Session: Stocks Open Mostly Higher On Drop In Trade Talk Risk Premium

The US exceptionalism index, which has admittedly been a poor indicator for the US dollar of late, is climbing higher again as EM struggles, the euro shifts lower and US stocks punch higher.

Meanwhile, the Fed's balance sheet stopped growing exponentially a while ago. This is not news, but after the USD has dropped 10% in a straight line against most G10 pairs, it is worth keeping in mind.

In an interview with Xinhua [ potential additions to the stimulus agreement just yet. But hope remains eternal, President Trump's announcement will provide impetus to negotiations with the Democrats that have stalled lately.

Given the number of "what if "scenarios likely clouding judgment, I expect the equity market skew to be more defensive in Asia compounded by the region's gnarly predisposition to the trade talk risk.

Currency Markets

Euro

The EUR/USD continues to consolidate lower, and just like when you put two violin experts in a room and attempt to appraise a 17th-century fiddle, you get five different answers. That seems to be the case right now as market participants are reaching for reasons why the consensus short-US-dollar trade has suddenly turned astray.

With the FX markets tending to follow, not lead, the fading momentum in the EUR/USD rally may reflect a growing focus on the path of COVID-19 in Europe. Although the new case count remains far below the pace seen during the pandemic's peak, many countries have seen a pick-up as their economies reopened. The headlines remain challenging. Germany's latest data shows the most significant daily increase in new cases since May.

The USD and risk appetite generally is unsure which way to move EUR/USD price action has been less than encouraging in the past few days, with the pair running out of momentum three times just above 1.19 Some longs continue booking profit Still, the pair is now approaching levels where there was good buying interest last week. Currently, it feels more like a consolidation rather than a change in momentum, as European stocks and fixed income are still trading bid; Bund/BTP spreads, for example, are at their lowest since February. I suspect longer-term views are looking to buy EUR/USD on a dip on a pivot to the September FOMC, but with the looming trade talks providing a bit of a "safe haven bid to the buck, the question is where to place that bid.

The Ringgit

The Malaysian ringgit has been predictably backpedaling ahead of this week's US-China trade talks. Still, more generally, the MYR has given ground to the US dollar after last Friday's better than expected US employment report which has seen US dollar demand pick up across the board. Still, more negative for local bond inflows is that US yields have shifted slightly higher.

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Arguably the ringgit bullish sentiment may have gotten too far over its skies to quickly, so traders were also quick to book profits on the first signs of weakness.

Gold markets

Gold remains supported by the geopolitical risk and potentially more US fiscal package delays. Still, the next leg higher could prove more challenging with the US dollar showing signs of returning to form, and as US bonds yields move higher on better than expected US economic data. US yields are admittedly low, and this is supportive, but the yield on the 10-year has inched up in the last couple of days, and the USD is slightly higher. That is not to say gold cannot move higher if nominal yields flatline or move marginally higher from current levels; it just means the load falls on other factors to enhance gold from a bullish perspective.

To get the gold smelters working in overtime and add jet fuel to the rally, the Fed will need to do to the heavy lifting vie inflation targeting, or macro scrim will need to see inflation breakeven normalize higher via higher oil prices.

Still, gold loves uncertainly, and there is plenty of that to go around while the yellow metal remains unquestionably supported by monetary accommodation, geopolitical risks, and the US fiscal standoff. But we've to hit some of the most bullish year-end targets already suggesting profit-taking could remain a course of action the longer it takes gold to launch higher. Not to mention, big producers could view these levels as attractive to hedge further production, which continues to flash the amber light on gold markets. Exposure is not correlating to physical demand as old correlations die hard.

Written By: Stephen Innes