Investor caution remains high amid geopolitical tensions, instability in global stocks, and a sharp rise in gold, which rose more than $100 to $4,865. While the US dollar (USD) has become only marginally firmer, concerns about Fed independence, flat inflation and rising yields could lead to a further reduction in US asset exposure in the coming months, Scotiabank chief FX strategists Sean Osborne and Eric Theort said.
Fed independence in focus amid rising market risks
“Clearly there remains a broader sense of unease among investors who remain concerned about Trump’s Greenland ambitions and their potential repercussions. The non-core major currencies, which underperformed yesterday, improved to the top positions on the overnight FX chart, while the major currencies – which were yesterday’s leaders – fell. The Swiss franc is the weakest of the major currencies on the day, while the South Korean won, South African rand and Mexican peso are the leaders. Global stocks are unstable – Mixed in Asia and Europe. Stocks fell in Europe while US bond futures were stronger, but Japanese government bonds rebounded after yesterday’s heavy losses.
“Evidence that investors are still increasingly nervous is gold rising over $100 to $4,865. The DXY is tracking slightly higher overall but the index is not strong and investors clearly remain cautious on the outlook; technical indicators remain bearish. While a small Danish fund manager has announced its exit from the US Treasuries market, we believe the risk of European investors en masse using US asset holdings amid escalating tensions with Washington is low.”
“But there are plenty of other risk factors – the president’s pick to replace Fed Chair Powell, persistent inflation, rising bond yields and the calendar risks facing rising US equity markets in the midterms this year – that could still prompt investors to reduce their exposure to the US dollar and/or US assets in the weeks and months ahead. The committee will hear arguments on the legality of President Trump’s push to fire Fed Governor Cook for cause today. This case may heighten investor concerns about the Fed’s operational independence.”
