We call to the attention of the $13 decline in the price of gold to $734 per ounce from yesterday’s 28-year high of $747, the biggest drop since the August 16. While benefiting from this year’s surging carry trades and liquidity, gold has also suffered from the market declines of late February and mid August as speculators cashed in from their gold positions to meet margin calls and in their losing positions of shorting the yen, buying higher-yielding currencies and equities. In each of those episodes, a pullback in gold brought about a retreat in most non-U.S. dollar currencies, with the exception of the Japanese yen and the Swiss franc. The resulting rally in the dollar was a manifestation of short covering in the US currency.
Determining gold’s obligatory pullback & the implications for the dollar Today’s dollar gains and gold losses are falling on the back of the biggest two-day loss in EUR/USD since August 15 and 16, as traders scale back euro longs ahead of the upcoming European Central Bank (ECB) and G-7 meetings, likely to issue some cautionary remarks about the strength of the euro. Yet without delving deeply into the rhetorical acrobats of the ECB and European politicians, the current euro pullback is a reflection of an obligatory retreat in gold prices.
We cautioned three weeks ago that gold prices have rarely exceeded 10% above their 200-day moving average over the past year. With gold’s 200-day moving average peaking at $667 per ounce, 1.10 of $667 equals $734 per ounce. Yesterday’s $747 high equals 1.12 of the 200-day moving average of $668. Thus, the relationship has worked, albeit with a slight variation (12% instead of 10% excess over the 200-day MA) and gold may now be expected to extend its retreat to as low as $710 per ounce. The dollar upside of such occurrence could emerge on the heels of a stronger than expected rebound in non-farm payrolls and/or strong language from Europe vis-à-vis the strengthening of the euro. A dollar rebound could also take place on the heels of a sell-off in equities, as has been the fact this year. A decline in the high yielding sterling is also expected to comprise a vital part of a short-term dollar rebound as the Bank of England is forced to shift towards a dovish stance.
U.S. pending home sales is due at 10 am, expected to have dropped 2.1% to 87.8 in August following a 12% drop in July.
Euro seen extending losses to $1.4060 before week’s end A combination of softer than expected Euro zone industrial PPI and pre G7 speculation regarding the strength of the is weighing on the single currency. August PPI slowed to 1.7% y/y from an unrevised 1.8% in July. Euro zone unemployment stood unchanged at 6.9% last month.
We do not expect the official G7 communiqué to address dollar weakness/euro strength mainly because the G7 meetings have constantly called for an “orderly adjustment of global imbalances,” of which a dollar decline is an unspoken but required development. The communiqué may once again call for greater flexibility in China currency regime, while appending the generic remark that “exchange rates should reflect economic fundamentals” and that it continues “to monitor exchange markets and cooperate as appropriate.” When all said and done, we do not expect the goal of the G-7 officials will be to stem the dollar’s decline or cap the euro’s appreciation but to temper excessive currency fluctuations.
EUR/USD eyes preliminary support at the 4-week trend line support of 1.4120. We expect further declines this week to breach the 1.4120 and target 1.4060 by end of the week. Upside capped at 1.4180.
USD/JPY gains seen capped at 116
The dollar rebound is pushing USD/JPY into the 115.80s, a level that proved to be of constant downside pressure over the past 3 weeks. A better than expected pending home sales report today is apt to breach its 5-week trend line resistance of 115.75-80 and target 116. Key resistance stands at 116.25. Support to stabilize at 115.50, backed by 115.40.
Sterling eyes $2.0320
We expect sterling to continue struggling to hold above $2.04 level and that emerging gold weakness/dollar reprieve ahead of Friday’s payrolls will accelerate sterling’s losses and target $2.0320 as early as today. Speculation of a possible BoE rate cut this week may also increase defensive sterling positions. We expect as much as a 40% chance of a BoE easing this Thursday. Yet even in the event of no rate cut, we continue to expect the currency to register considerable declines in the case of a better than expected US non-farm payrolls report in Friday.
Cable eyes $2.0350, followed by 2.0320. Key foundation stands at 2.0270. Upside capped at 2.0420
USD/CAD targets $1.0020 As gold prices extend their declines and crude oil post its third consecutive daily drop reaching $79.50, the Canadian currency loses some of its steam. Based on USD/CAD historical tendency to gain at times of risk aversion, we expect the pair to regain the $1.00 figure and extend to as high as 1.0020. Thursday’s release of Canada’s September Ivey PMI – expected at 61 from 58.5-- and Friday’s employment report – seen creating 16.5,000 in payrolls and a rise in the jobless rate to 6.1% – will be key for the pair. Support to stand at 0.9950, followed by 0.9920.
Ashraf Laidi Chief FX Analyst CMC Markets US a.laidi@cmcmarkets.com
