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Asia Wrap: BoK Surprise Hold. Gold Stabilizes

Risk Markets

Concerns over the global spread of the coronavirus continue to weigh on markets with equities remaining soft and yields near the lows. Still, the follow-through into G10 FX remains relatively subdued, especially on USD/JPY.

I think everyone is on the same page now; more virus spread terrible for stocks.

Bank Of Korea

The biggest surprise of the day has come from the Bank of Korea (BoK) after they unexpectedly left the policy rate unchanged at 1.25%. This pause drills home just how uncertain central banks are about calibrating a monetary policy response to the coronavirus outbreak, echoed by Fed Vice Chair Clarida earlier this week. Let’s face it South Korea was one of the proxies hardest hit by the secondary virus cluster effect suggesting its a supply-side boost that is most needed

Fiscal Pump

We know the banks can’t boost the supply-side dynamics, so they remain in” wait in see” demand damage control mode. But of course, what’s most desperately needed is a fiscal response, which has been lacking so far, outside of recent measures in Singapore and HK.

A g-20 response is likely coming, but for those looking for shock and awe, fiscal delivery, there’s always a strong chance they will be disappointed.

But its the fiscal pump that could be what’s holding gold prices back at the moment as expansionary fiscal policy could increase global bond yields precipitously. At a minimum, the lack of a significant dovish central bank impulse isn’t great for gold markets either.

Currency Markets

GBP

Concerns that the weak economic outlook and the coronavirus could defer spending and tax cut proposals into Autumn as well as the souring mood into UK-EU trade negotiations keep weighing on GBP/USD.

AUD

The G-10 China hyper beta, the AUD/USD, remains on the back foot as the selling pressure seemed to louden overnight ahead of next week’s RBA. It has not looked back since breaking the short-term triple bottom at 0.6580-90. AS for the rest of the ASEAN basket, traders have turned a bit neutrals today.

CNH

USD/CNH bounced off the overnight low and remained better bid in a confined range as onshore spot continues to face reportedly strong equity outflows again. But with the Yuan remaining anchored to the PBoC policy guidance, volumes have rather light.

Gold markets

Gold is stabilizing, but a series of lower lows and highs don’t bode well for the bulls over the short term. I still like the buy on the dip since I’m not running to much short-term risk, but the lack of intraday volatility is making things a bit challenging to keep one’s focus Expect support at $1620 before $1600. A daily close below $1580 would be a bit of a trap door event I would think

Jewelers I chat with are crying about the considerable drop in physical demand since the virus hit. So, the bearish aspect of reduced consumer demand amid the economic slowdown could be depressing prices as physical does remain a significant demand channel.

Fundamentals still lean towards a bullish bias as stocks remain under pressure yield structures are pointing lower while the US dollar is trading weaker vs. the euro all correlate gold higher. And my best guess is it will take a significant US turn in the virus spread headcount to spook investors out of their long gold position.

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