The Yuan continues to strengthen due to its superior economic backdrop relative to other currency trades and sets it at the top of the macro heap – Stock Market Analysis Today: Yuan continues to gain strength.
The better retail sales data for September continues to resonate and signals that domestic demand is holding up.
Simultaneously, the lack of short dollar viable alternatives is likely to keep people in the trade, with the upcoming US-election deterring risk-taking, rising Covid-19 cases & restrictions in Europe, and GBP experiencing Brexit-related volatility.
How traders view the Yuan
The markets favoured weaker US dollar expression is USDCNH lower, especially if one believes a regime shift afoot.
Beyond China’s macro fundamentals and possible People’s Bank of China (PBoC) regime shift, USDCNH downside remains the path of least resistance in the two most likely US election outcomes (judging by prediction markets and the polls): a Democratic sweep Biden presidency with split Congress.
A regime shift brewing?
The macro-dynamics in China are rapidly changing, where supply chain dominance is giving way to internal consumption. It is unlikely that China will continue to pump excess reserves into US bonds to support US consumption of Chinese exports.
And since China’s regulators have shown little appetite to pump up the market using an over-inflated credit mechanism, it is down to the strong Yuan to act as a magnet to attract bond flows to pay for new internal consumptions engines and external initiatives.
And we may be entering a period in time where the Yuan will start to steal some of the US dollar’s exorbitant privileges. The RMB’s gravitational pull has gone well beyond Asia FX and is gradually becoming a significant bellwether for G10 currencies.
Oil remains supported – Stock Market Analysis Today
Oil remains supported by stimulus optimism and vaccine news as OPEC compliance is widely expected to protect the downside for oil prices.
The group warned about the precarious state of the global demand recovery. Several comments suggested a proactive approach to defending the oil price, with the Saudi Energy Minister promising to “nip negative trends in the bud.”
Plans to ease production cuts were reportedly not discussed at the Joint Ministerial Monitoring Committee (JMMC), but I believe that is very unlikely in the backrooms.
While it is perhaps a bit early to consider modifying the existing production cut plan, this may explain some of the negative sentiment in oil recently.
My view is that there is now a clear precedent established for the proactive approach referenced in comments yesterday, both at OPEC+ group level and through the individual actions of key producers like Saudi Arabia.
Suppose the ramp-up of Libyan production and the global demand recovery pace is a problem for the oil price then expect, as most oil traders do, a slower return of shut-in OPEC+ production. This seems likely to be addressed at the full OPEC+ meeting on November 30/December 1.
Stimulus hopes drive gold price action – Stock Market Analysis Today
Gold is getting driven 100 % by stimulus banter.
Gold is holding and maybe waiting for an event or development that will give it direction or greater clarity. This could be the passage of a stimulus package before the election, or if not, the election itself.
Expectations for an immediate breakthrough on the stimulus still appear relatively low, but expectations are still open to change, affecting gold and silver.
Regardless of the near-term fate of the stimulus package, other factors underpin gold and also silver. The COVID-19 count is rising, and the US election nears.
Fiscal policy support has been a critical support factor for gold. And if there is one sure thing, the stimulus is coming.
Whether it’s a ‘blue wave’ or a capitulating Democratic House cutting whatever deal it can or even if it’s Trump’s ‘4 more years’, the stimulus is going to be very necessary as viewed through the lens of rising US initial jobless claims which will only become more painful towards year-end as state-level unemployment stop-gaps fall under pressure.
Indeed, this should be enough to support gold and silver, and I expect mild gains. One significant risk here is that Blue Wave could lead to a massive fixed income sell-off and an explosion higher in the US yields.
Majority control of the Senate remains a key factor that may impact the potential for policy change.
With US equities, the US dollar, and the UST curve (5s30s) trading in relatively tight ranges month-to-date, the stimulus debate’s ebb and flow should matter less than what different election outcomes mean for stimulus prospects in 2021.
On that front, the potential stimulus is greatest under a Democratic sweep (presidency, Senate, and House), followed by a status quo Trump re-election with split Congress.
The weakest scenario for fiscal stimulus is under a Biden presidency and split Congress.
Stock Market Analysis Today: Yuan continues to gain strength