Even Kim Kayne helps the dollar

Silver and gold rallies continue

Precious metals are once again front and centre in Asia this morning. But it is silver that continues to glitter brightest, although gold is certainly not dull. As is becoming the norm of late, silver has exploded higher in early Asia, up by 5.70% again today, dragging gold higher with it, climbing 1.50% itself.

The precious metals are merely the brightest envoys though of renewed momentum in the great US dollar rotation trade. The greenback was heavily sold on currency markets overnight as well, with the euro in particular running rampant, boosted by impressive German IFO data.

As is the market’s want, there is an insatiable need to fit facts to the short-term price movements, with some notable financial papers falling into the trap. For example, if the great and the good of the investment world are suddenly worried about the US economic recovery, why did US stock markets rise impressively overnight? The story this week is the dollar’s fading haven lustre as Covid-19 threatens to nip the United States’ economic recovery in the bud. That theory does have merit. But in case nobody has noticed, Covid-19 has been rampaging across the US sunbelt for weeks now. Nobody cared last week, so why did it suddenly become important now? Please see above for the answer.

FOMC decision next

The answer itself lies in the Federal Reserve FOMC meeting this week. The Fed is expected to be ultra-dovish in its statements after the meeting, and I find it bemusing that the markets are suddenly handwringing about it. If we are all honest, were they going to be anything else but? Show me a hawkish central bank in the world, and I’ll call it Venezuela. The answer lies in the ongoing effects of the uber-dovish Fed. US nominal bond yields will almost certainly continue tracking lower afterwards, if not before. That will push real bond yields further into negative territory, where they are negative right out to the 30-year tenor.

That is the real reason why the US dollar sell-off is accelerating. Precious metals pay a zero percent yield, but if real yields on the US curve are negative, zero percent looks like a pretty good deal. The bond market is also telling us we can put inflationists back in their corner as well. The threat of the debasement of fiat currencies is real through bottomless amounts of central bank quantitative easing—another reason why precious metals and bitcoin & co are rallying.

Bond markets are saying the best we can hope for is a very fat U-shaped recovery. I can’t disagree and have changed my tune on 2021 inflation, vaccine arrivals in Q4 or not. The reappearance of Covid-19 in broad swaths of the world, in places it had allegedly been controlled, highlights the dangers of both the virus and its potential to nip nascent recoveries in the bud.

The recoveries we see in other parts of the globe with more competent administrations than America’s are fragile. The US dollar is falling because real yields have joined the negative yield club. A situation is likely to continue to be helped along by the Fed this week. In that light, the US dollar sell-off is because, for now, the greenback is the ugliest horse in the glue factory. No amount of saying yes to the dress, Botox or Kardashian cosmetics will change that fact anytime soon.

Regional eyes were focused on Malaysia today, with the first verdict due in the trial of former Prime Minister Najib Razak’s 1MDB corruption charges. As well, as a test for the new government and the rule of law in Malaysia, international investors are watching closely to see if Malaysia goes back to the future. Mr. Razak has just been found guilty. The ringgit and FKLCI are both holding onto their day’s gains post the verdict. Malaysia will remain a regional underperformer, along with the Philippines and Indonesia for the rest of the year. Investors, though, are likely to take heart from the verdict. The Malaysian trade date is expected to make a slight improvement on the headline at midday. But that will mask falls of 8-10% on both the import and export components.

Fitch has reaffirmed China’s sovereign debt ratings at A+ with a stable outlook. They note that China is staging a remarkable recovery and have robust external finances. That should give a booster shot to mainland and regional equity markets this morning.

Elsewhere, New Zealand suspended its extradition treaty with Hong Kong today. Inevitably, China has responded by stating the decision is a violation of international law. Something China usually isn’t too bothered about when it suits them. If China’s usual game plan is followed, some sort of none too subtle retaliation will follow. New Zealand Lamb and Pinot Noir may find itself stuck on the docks with customs delays now. It will be China’s loss though, as their best second choice will be from Australia, whom they are also grumpy with. Investors may want to hit the pause button on buying the New Zealand dollar or shares for the next 24-hours, though.

The data calendar internationally is strictly second-tier tonight as markets gird themselves for the FOMC rate decision and comment early Thursday morning, Asia time. Shock headlines aside, the great US dollar rotation trade should find no speed bumps over the next 36 hours.

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