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USD Bears in Control Amid Risk On Markets




USD bears have regained the upper hand this morning, pushing DXY below the 99.50 level amid a wider lack of demand for havens at the start of this week. Meanwhile, risk FX (AUD, NZD, CAD, NOK, SEK and GBP) are performing well. 


Why are markets risk on?


It seems that the themes that have supported sentiment over the last couple of months since the March sell-off continue to be in play this week; 


1) Covid-19 curves continue to flatten. 


Falling Covid-19 spread & death rates continue to be observed across key markets such as the US, Europe and UK. Meanwhile, lockdowns continue to be eased, allowing economic activity to return to normal. Moreover, reopenings have been going on in most major markets now for a few weeks, and we have not yet seen an increase in the spread rate of Covid-19 (yet), which is easing nerves of a second wave of the virus.


  • The US CDC reported the coronavirus death toll rose by 620 (remember a few weeks ago when this was more than 2k per day?) to 97,699


  • UK COVID-19 death toll rose by 112 (remember a few weeks ago when this was nearly 1k per day?) to 36,914 


  • UK PM Johnson said the government plans to allow car showrooms and outdoor markets to reopen from June 1st and will allow all non-essential retail to open from June 15th. 


  • The German government said it wants to end travel warnings for tourists from 31 European countries on June 15th, but only if the coronavirus situation allows it. 


  • Japanese PM Abe formally lifted the nationwide state of emergency.


2) Central Bank’s continue to pledge more support. 

Yesterday, the main central bank headlines were for the Bank of Canada and ECB. BoC Governor Poloz said that significant monetary stimulus was still needed and the bank was not concerned about inflation at the moment now. Elsewhere, ECB’s Villeroy was also very dovish; he spoke of how more easing would need to be done via a potential increase to the size of PEPP. Moreover, he said the ECB is willing to let inflation overshoot its just below 2% target. 

Over in Asia, PBoC Governor Yi indicated that moderate stimulus was here to stay, while BoJ Governor Kuroda said that new easing measures may potentially be needed. 

3) China softening stance on Hong Kong?


“China sought to reassure Hong Kong that its judiciary would remain independent under a new national security law, as concerns grow that the city may lose one of its key selling points for international companies” reported Bloomberg - basically China seems to be attempting to play down the whole Hong Kong issue, which might ease tensions with the US a little. 


“The legislation will not change the one country, two systems policy, Hong Kong’s capitalist system, high degree of autonomy, nor will it change the legal system in Hong Kong SAR, or affect the independent judicial power, including the right of final adjudication exercised by the judiciary in Hong Kong,” Xie Feng, commissioner of China’s Ministry of Foreign Affairs in Hong Kong, said at a briefing Monday.


As long as Covid-19 infections and death rates continue to head in the right direction, facilitating economic reopening, and central banks continue to pump stimulus (which they will), expect a floor to remain under risk appetite. 


Could a return to the rising US/China trade tensions spoil the party?


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