Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Currencies At A Crossroads (And How That Could Affect Gold)

Published 27/05/2015, 05:22
Updated 09/07/2023, 11:31

With the final sessions of trading on deck for May - and following a week in which the US dollar index rallied over 3 percent, the USDX arrives at another potential crossroad: Continue heading north above milepost 100 or get back on a reflationary road to the southeast.

Technically speaking, considering the relative performance extreme reached in March, we remain in the latter camp and continue to contrast the 1985 secular pivot as a roadmap through the prospective turn.

USDX 40 Year MonthlyUSDX Monthly 1984/1985 vs 2014/2015USDX Daily 1984/1985 vs 2014/2015

To date, the bounce has taken place proximate to where momentum in the historic pattern alluded, with the 1985 market retracing 50 percent of the initial downside pivot.
USDX Daily 1984/1985

Through Tuesday's close, the USDX has retraced 61.8% of the current move.
USDX Daily 2014/2015

Euro weakness—the largest currency component (57.6%) of the USDX—has resurfaced as a resolution in Greece remains elusive, as time runs out for the troubled nation to avoid a possible default and make the first of four payments in June to the IMF next Friday.

Recently, there's been talk of allowing Greece and its creditors more time to negotiate a final funding arrangement without default, by allowing Greece to bundle the four payments together at the end of June. However, this extension will only be feasible if there is credible confidence communicated to the markets that both parties were working towards a tangible and realistic resolution.

All things considered, and as described in previous notes, we believe at the end of the day it's overwhelmingly in the best interest of the EU and its strongest economy—e.g. Germany—to compromise with Greece and avoid a fracture in the monetary union. Considering the election results in Spain this weekend that echoed Greece's sharp pivot to the left last year - and the reality that there is no firewall tall or broad enough to contain contagion if a larger member such as Spain looks to follow suit - we expect the gamesman and brinkman-ships to set sail towards calmer and more considerate seas.

As such, we will be looking for early strength to be sold in the back half of this week as markets set their sights on June.

On a tangential currency slope and making up the second largest weight of the USDX (13.7%), the yen also remains at an important crossroad: Break long-term support - or find traction and strengthen from the correlation extreme extended with the Nikkei over the past two years.

On Tuesday, the yen traded below long-term support as the US dollar broadly strengthen against all 16 major currencies. While certainly not a vote of confidence toward our own expectations that the yen will strengthen from the correlation extreme with the Nikkei; from a relative performance perspective, the yen remains stretched by more than 2 standard deviations below its 45-year trend (h/t: Will Slaughter) - and completing what we perceive to be an inverse resolution of the correlation extreme witnessed during the financial crisis (see below).
Nikkei:Yen Monthly 1980-2015

In view of this, we continue to favor a position in the yen, predominantly as a hedge of equity exposure to Japan. Similar to the resolution of the correlation extreme between the yen and the Nikkei in Q1 2009, it wouldn't surprise us if the previous outperforming asset (yen 2009/Nikkei 2015) initially underperforms as the markets transition to a new, positive correlation relationship.
Nikkei Monthly 1980-TodayNikkei Weekly 1987-1989 vs 2014-2015

The yen has audibled from the 1998 comparative trend, by breaking back below at the vertex of the descending range it remained in over the past 5 months. Our biased suspicion is that the short-term breakdown in the yen and breakout in the closely followed USD/JPY currency cross will be ephemeral, as those late-to-the-party buyers of the breakout will add fuel to the prospective reversal. This brings to mind the old technical market adage - from false moves come fast moves.

Yen Daily 1998/2015

That said, gold and the precious metals sector have closely followed the trend breaks in the yen over the past four years, with the three month rally recently turning down last week with continuation through yesterday's close.

Should the yen continue to decline below long-term support, it would strengthen the expectation that new lows in gold and the broader precious metals sector (including Market Vectors Gold Miners ETF (ARCA:GDX)) were forthcoming.
Yen:Gold Weekly 2010-2015Yen:GDX Weekly 2010-2015

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.