Dollarretreatandoriginofuncharteredterritory

It is Monday morning and some of the important trends from the last week are continuing. These are the strength in the Euro, Pound Sterling, Yen and gold.

As we will not be able to devise new reasons for the new week it is best to relook the reasons for the rise. The Euro strength has been a direct consequence of the solidarity which the EU showed in coming up with a pandemic relief program. The opinion has always been predicated on the belief that the Eurozone is slow to respond, and on issues requiring unity, there is always some or the other stumbling block. The ECB and the EU parliament also have to go by the strictly defined mandates which are written in the constitution and are legally enforceable. So the pace and unity has taken the currency watchers by surprise which resulted in the current spike.

The other currencies have also rallied against the dollar as the dollar has seen a broad-based decline. The dollar index is trading at 93.95 which is its lowest level for 2 years. The despondency in the dollar can be attributed to the resurgence of virus cases in the US, unlike Europe. What the resurgence does is it makes the reopening and the V shaped recovery ever more elusive. It also means that the government has to support the individuals and the businesses for that much longer by digging deeper into its pocket. The government pocket, as we know from basic economics, is not infinitely deep, even if you are the US. Things get more complex if you throw the Sino US tension and the presidential elections into the mix as well.

We now move into the week where the Fed will come up with its policy on Wednesday. Rates which are already on the zero boundary are not expected to change, hence the focus will be on any additional stimulus which might be announced. The other event which markets will be watching will be the debate in congress where lawmakers will try to come up with the another round of pandemic relief measures. We remember that in multiple testimonies Fed Chief Jerome Powell has said that the ball is firmly in the court of the law makers to design more relief.

The news of the moment is on gold which has crossed its all time high of 1920 which was seen in 2011, and is currently trading at 1933$/oz. Gold is effectively in “unchartered territory” now. This phrase owes its origin to the naval history of the English language where the audacious ships sailed into new seas with a hope and belief that they would find new lands with no maps to guide them. The idea is that once you are in unchartered territory, anything is possible, as you are not constrained by what was previously imagined to be the limit. We will continue watching the gold space keenly.

Domestically, the rupee has opened firmly against the dollar, currently trading at 74.70. The 10 year benchmark bond is trading at 5.82 slightly right from the Friday close. The event which the domestic bond market is watching is the MPC policy meeting in the first week of August. The auction cut off on Friday was mostly in line with market expectations.