Market Overview

27 July 2020

Is the Dollar the Emperor Wearing no Clothes?

As central banks keep the "money printers" running. the spot gold contracts traded as high as $1,944 per troy ounce in early hours today. The yellow metal prices have already surpassed the previous historical record set in September 2011, and the upward pressure is still not easing after the European noon. 

The Japanese Yen, another safe haven asset, which is suffering after huge amounts of quantitative easing (QE), as everybody realises that it is just another name for the "money printing press", has strengthened significantly over the past couple of days against the Dollar. The Brexit-eroded British Pound has grown too. All of the above suggests that it is the U.S. Dollar that is shrinking as a universal unit of measurement, and that is may be losing its weight step by step. Even some diverging assets are becoming more and more expensive against the backdrop of a cheaper Dollar. 

The barrage of accusations from the U.S .White House to Chinese authorities is also among the factors. Many people in the market believe these are purely a pre-election rhetoric with no real consequences for the future of the so-called big trade deal and that it is harmless for "phase one", but U.S. President Donald Trump just repeated at the end of last week that the phased trade deal that the two countries signed at the start of the year “means less to me now than when I made it” due to China’s role in the spread of the coronavirus. The Secretary of State Mike Pompeo also had a smack on China on Thursday by saying that Washington will no longer tolerate Beijing’s attempts to usurp global order. 

As a result, the Chinese stocks reacted badly to the threat. The Shanghai Shenzhen CSI 300 index fell by 4.4% on Friday to touch its lowest levels in three weeks, but it generally kept the 4500 major support in the vicinity of July 17 close price and then rebounded by 0.5% to 4528.45 points on Monday. The U.S. Dollar rose to a three-week high of almost 7.03 vs the Chinese Yuan before the end of last week but it also retraced to the 7.00 area again during today's Asia trading. Judging by this reaction, the markets are still not too scared by Sino-U.S. tensions. Chinese industrial profits increased at a faster pace than June, some data from the National Bureau of Statistics reported on Monday. Industrial profits grew 11.5% on a year-on year basis, following a six % rise in May, with profits of steel companies up by 35.3% percent as the profit of non-ferrous metals grew 24.1%. Altogether, in the first half of 2020, industrial profits in China declined 12.8% from the same period of 2019. 

Another a confirmation sign that the markets perhaps do not actually see such global shocks that would cause them to run away, is the persistent reluctance of the currency market to use the Greenback as a safe haven role performer. On the contrary, escapist moods in relation to the U.S. Dollar are growing by the day, especially among smart money owners that are big funds, old traditional banks etc. 

"There's a trade war, there's a technology war, there is a geopolitical war and there could be a capital war," Bridgewater chief Ray Dalio told Fox's Sunday Morning Futures. "If you say by law 'Don’t invest in China,' or even possibly withholding the payment of bonds that the U.S. owes payment on in China - these things are possibilities, and they have big implications, such as for the value of the dollar... The things I worry about the most are the soundness of our money... You can't continue to run deficits, sell debt or print money rather than be productive and sustain that over a period of time... If we don't work together to do the sound things, to be productive, to earn more than we spend, to build the stability of our currency and build the balance sheet, we are going to decline... We are declining because of those things," he added. 

"The Dollar seems to have lost the title “King,” at least for now, as it continues to be dragged lower despite all the negative news which used to attract inflows from global investors," Hussein Sayed, the Chief Market Strategist at FXTM remarked today. The latter comment is vividly reminiscent of "The Emperor's New Clothes," which is a story written for children by Hans Christian Andersen, about a vain king who pretended or hoped to have the best clothes in the whole world, but instead he was exposed before his subjects. Indeed, not only gold, silver, or even Bitcoin are rising against the U.S. Dollar. It is not yet proven that a mountain of freshly printed green papers, plus the old safe-haven status, would safely serve as something better than just a fig leaf. 

As for the EUR/USD, the pair is hitting one high after another, climbing above 1.1725 for now, and perhaps this is not the limit. The single European currency continues to increase in price despite the considerable power of the printing press from the European Central Bank (ECB), which is, not so terrible in quantity as the emission of the U.S. Federal Reserve (Fed). But the annual growth of the monetary aggregate M3 accelerated in June, as it increased to 9.2% from 8.9% in May, according to the ECB report today. And the annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, stood at 12.6% in June. The annual growth rate of marketable instruments (M3-M2) increased now to 10.1% from 5.7% in May. 

Reuters reported that German business morale improved further in July after posting a record increase before in June, the German Ifo institute' survey showed on Monday, suggesting that most companies expect  that the German economy could recover faster from the coronavirus shock. The Ifo's business climate index rose to 90.5 from an upwardly revised 86.3 in June, and this was the third increase in a row. The Euro is still substantially supported by the approved joint crisis recovery fund last week, which Gabriela Santos at JP Morgan characterised as "one small step towards fiscal integration, one giant leap for Europe and European assets, whose equities have underperformed the U.S. by 174% pts in USD terms over the past ten years". "There are a few transformational aspects: 1) it will be financed by the large issuance of common EU bonds, 2) the debt will be serviced by the EU budget, and 3) the funds will be allocated to countries based on need, not on contribution to the budget... Crucially, high debt countries will receive these funds financed by the European Commission’s AAA rating, instead of by their own much lower ratings. While this is exactly what the US does for its states on a regular basis, EU countries had never agreed to this level of fiscal federalism before," she emphasised in an investigation note. 

Again, the Fed may signal to more future steps to increase economic stimulus, as its July meeting will end on Wednesday. It is difficult to expect any high-profile statements from the U.S. regulator with an immediate effect right now, but markets believe that Fed officials may begin to prepare the ground for new measures that may follow in September or later in the course of the year. 

The Commonwealth Bank of Australia’s Vivek Dhar, a mining and energy commodities analyst, said the fall in U.S. ten-year Treasuries real yields has been the “most important driver” among other factors that weakened the U.S. Dollar and safe-haven demand being lifted. “The negative relationship between long term U.S. real yields and gold futures has held up fairly well over the longer term. That is because when long-term U.S. real yields increase gold is less attractive relative to U.S. interest bearing securities since gold has no income earning ability,” said Mr Dhar. “The fall in US 10 year real yields is primarily being driven by an increase in US 10 year inflation expectations," he added. Johan Jooste of The Global CIO Office explained such a viewpoint by commenting for CNBC on Monday that the “opportunity cost of holding gold is virtually zero” with Treasury yields at their current low levels. Still, he added that there’s a “horrible feeling of chasing it a bit after the fact” if investors enter the gold market now.

 

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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