Contradiction Rules as Gold Lifts



Outside of rising tensions in Hong Kong and the Middle East not that much has changed for the currency markets as the final trading day of the week gets underway. Granted, the dollar and the JPY are both a bit firmer and the EUR, GBP and commodity currencies have all gradually lost ground as the week has progressed.


Beyond the FX space though the disconnect in terms of risk it seems is still extending. The bond markets globally are still attracting flows and consequently yields everywhere are lower this morning.  Gold too has rebounded, setting fresh interim highs this morning, around $1355 as I write. However, equity markets are still holding most of their recent gains. Perhaps, it’s just a case that the anticipation of lower interest rates is the real driver for all these markets and risk aversion has nothing to do with it at all?


Whilst that assumption doesn’t necessarily add up to me, I can nevertheless understand the short term dynamics that might be driving it. The money sloshing around the planet simply has to find a place to park itself and right now that’s being forced to look for yield in the equity space at the same time as lower bond yields make gold a more attractive place to be. Clearly though, paying a central bank for holding your cash is still very much vogue as well.


So, in this negative interest rate world, the fact that US yields are still very attractive in comparative terms, despite falling so much in recent weeks, is what has stopped the dollar from falling much. If nothing else, its certainly attracting ‘selective’ dollar buying on dips, as we have seen over the past week. The weak US payroll data, which did dent the dollar initially last Friday, clearly hasn’t been sustained a week later.

 

But here’s the thing; the JPY is still very much in demand too, with the USDJPY not really making any headway since last week. The price is around 108.30 as I write, so that’s still near its lowest levels of the YTD. That might be better explained when one looks at the correlation between the Japanese currency and gold, but if it is risk aversion that’s driving these two, then that surely cannot explain why the equity markets have been so resilient.


Consequently, this divergence I already noted a week or two back is still playing out, but for how much longer I wonder? If it was just that holding short term liquidity in government bonds was simply so unattractive, then I could understand the desire to continue to hold equities, but clearly that’s not the case because the bond markets are still rising. Well, in any case, dazed and confused, I am still watching this all stretch out like its some giant elastic band. It will snap at some point of course, but with the beach beckoning for many now, perhaps its going to take a while longer?


Meantime, whilst I am mentioning gold this morning its worth pointing out that there is an important downtrend resistance level not far away now which is around $1358.50.


To better see that please take a quick look at the chart below of that which I peeled off earlier this morning before the price moved above $1350.



As you can see the level of this red line is very close by indeed now and certainly a potentially important stopping/or breaking point and hence definitely the level to watch today.

Data wise today its all eyes on the latest US retail sales numbers later on for further clues on the strength of the economy.


Elsewhere, whilst the political journalists like to make much of the Tory leadership race, for now the market is pretty bored off with the whole sorry saga by the looks of it. Nevertheless, the pound is still in play further out, but holding its breath again for now.


Important Economic Releases Due Later Today

14/06- 1.30pm US May Advanced Retail Sales Report

14/06- 3.00pm US University of Michigan Consumer

Sentiment Index- Preliminary June Reading

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