Risk appetite is recovering from last week's COVID-19 inspired beat down dip, and "risk-on" FX is accordingly higher even though the news flow is light outside of the Navarro misquote. COVID-19 headlines continue to offer some grounds for caution, but appear not to have the same traction as a week ago in the FX or risk markets
The euro is contending with several moving parts this morning, but none are unusually absorbing. The recovery in risk appetite has allowed the euro to advance against the US dollar, taking it back above 1.1250. Earlier in Asia, the EUR/USD had gone on a wild ride from 1.1280 to 1.1233 and 1.1265 bid now with White House adviser Navarro telling the Wall Street Journal that his earlier comment on China trade deal being 'over' was taken wildly out of context and that he was trying to make a point about trust.
GBP was trending a bit stronger this morning as the prospect of more fiscal stimulus, which outweighs BoE signals that rates are likely to be low for a long time.
The AUD has recovered from initial weakness after the RBA expressed little discomfort with the currency's level. News that the state of Victoria had extended its COVID-19 lockdown by four weeks had previously contributed to the AUD's soft tone. Today was relatively quiet outside of the algo steamroll around Navarro headlines and subsequent walk back.
The market is starting to build long AUD/NZD into the RBNZ meeting as we suggested yesterday the market could be underpricing the risk for the RBNZ to head below zero lower bounds.
USDAsia is still cleaning up the mess the back of US-China trade news. This is just horrible timing as I am sure freshly printed Asia longs did their best version of a cut and run on the false trade war headline.
Lower US real yields and stable market-based inflation expectations are hitting the sweet spot with "carry traders." The USD was showing signs of rallying with equities through last week, but that has given way to the AUD and other risk beta currencies retaking their cue from US equity markets. So, with currencies reacting favorably to "risk-on" and US interest volatility entirely suppressed by the Fed. FX carry appeal will continue to surge.
It's a perfect way of you want to stay clear of the stock market volatility as we enter the summer doldrums of July.
FED Swap Lines Taper
A week ago, every trader on the street flagged that the Fed's central bank swap lines, a significant contributor to the easing of the dash for dollars in late March and early April, have significant maturities in late June.
Indeed, outstanding swaps appear to be tapering fairly quickly, down to $280bn from nearly $450bn in late May.
And towards the end of last week, the ECB, BoE, BoJ, and SNB announced they will be offering USD liquidity three days a week instead of five. But rather than hit the panic button, traders should view falling demand for swaps in a positive light that borrowers are now able to find cheaper USD funding elsewhere that tapping the Fed lines.
But looking at price action early this week, which is re-establishing the market risk on and off proclivities via FX. Suggesting the dollar's outperformance last week has less to do with any funding issues and more with overstretched technical and the lack of progress on the EU recovery fund.
Gold Receives A Boost
Declining US real yields (-year at a 7-year low at -0.65%) signal fairly gnarly economic growth expectations will further support gold and undermine the USD so long as inflation breakeven. Currently, rangebound (5Y5Y inflation swap: 1.82%) avoids a dive lower.