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Grim news around the second wave hitting the US. Texas is now in the process of halting its aggressive reopening strategy on what the governor has labelled a “massive outbreak” this goes hand-in-hand with the spikes seen in Florida, Arizona and now Nevada. Clear negative and reiterates what I have been writing about for a few weeks now.

Yet somehow risk assets are looking straight through this and are buying with an almost complete abandonment of risk mitigation. In fact, FX is actively looking for fundamentals backing this thesis and almost wilfully ignoring anything against this view.  

For example, have a look at the reactions to the activity surveys from Europe to the US which showed signs of solid improvement. 

European manufacturing and services flash PMIs beat estimates last week and show solid improvement month-on-month although, both are still in contraction territory. 

The US Flash PMI numbers may have miss estimates but are now at breakeven and are actually accelerating a trend that has been building since the end of April.

Couple this with further signals that Congress will approve further government stimulus for the US economy, the Fed holding its foot to the floor with monetary stimulus and global growth reawakening all this lead FX to just ‘buy risk’. 

This saw the USD halt its appreciation against the majority of the G10 (CAD being the exception). Which meant it bucked the trend of the past 2 weeks where the USD had been double blessed technically and fundamentally. 

Therefore, EUR/USD found itself back above $1.13, GBP/USD back above $1.25 (helped of course by UK PM Johnson relaxing distancing rules) and AUD/USD back above $0.695 – all confirming the risk thesis. 

However, this looks like a short-term movement, the risk is overbought on RSI metrics and riskier currencies are becoming stretched on several other fronts too.  

I would also point out the reaction to Peter Navarro’s ‘Freudian slip’ comment on national TV that the US-China trade deal was “over” due to a lack of transparency on Covid-19 put markets into a spin. 

Those same risk-sensitive currencies that are overbought crumbled on this comment with AUD/USD falling from $0.6920 to a low of $0.6858 while USD/CNH shifted from CNY7.0600 to CNY7.0882. 

The President was out very quickly quashing this idea on twitter declaring the trade deal was indeed intact. But the event shows the double blessing of the USD is still there from a risk-off standpoint.