In 2013, forex trading was linked intimately to expectations regarding changes in the Federal Reserve’s quantitative easing policy. Certainly, in 2014 market expectations will continue to focus on the future of tapering policy.
With Janet Yellen confirmed as the new Fed chairman, gold is now focused on the different economic trajectories of the various major economies. The U.S. is strengthening while the U.K. is trying to cool off its hot housing market.
The Japanese yen and benchmark Nikkei 225 equity index both broke out of significant consolidations last week. The moves are highly related; in fact, the negative correlation between Japanese equities and the yen has been incredibly consistent over time.
The yen rose for the first time in four days against the dollar amid speculation further policy measures may be needed to weaken the currency after Prime Minister Shinzo Abe’s coalition cemented control of parliament.
Gold and silver got hit badly, which tells us that investors think this is no more than overbought equity and bond markets unwinding. As long as no one is seriously considering systemic risk, they are unlikely to flock to gold or silver.