The entire precious metals complex corrected in unison on profit-taking and firmer USD, and I think there was some technical around delivery risk playing into mood music for gold.
The bullion complex corrected after recent substantial gains. A "risk-off" mood in Europe didn’t help gold one bit, which edged down in both Asian and European trading but fell hardest in US hours before mounting a recovery off the mat.
The gold market is signalling that fears have eased over supply-chain snags that, in March, set off a clamour to get hold of the metal. On Thursday the discount of the most-active futures to the second most active widened to the biggest since 1981, a sign that more buyers want to roll into later contracts rather than take physical delivery of the metal.
Harmful economic US data did not help gold. That was because high and, more importantly, enduring joblessness is deflationary. When compounded by the fact the FOMC statement poured ice water over the prospect of negative interest rates this week, it hasn’t been a bullish setup for gold into week’s end.
Neither weak economic data nor ongoing US-Sino tensions over the Covid-19 pandemic could rally gold. Perhaps lingering optimism about a vaccine, backed by a massive investment in research – including USD1bn funding by the US to a UK drug maker – raised investor hopes and might have weighed gold.
Beyond that, it was difficult to identify a "smoking gun" as there seem to be a lot of fast money and momentum plays in the gold market these days as virtually everyone seems to be trading on shifts in the directional bias.
We could see more profit taking on gold with long speculative positioning still to blame. The increasing tensions between the US and China should be positive for gold vs. equities, but on a broader risk-off move there could be behaviour similar to March where gold gets dragged lower on distressed sales. I don’t have a strong bias on gold right now but, if anything, XAG longs could look attractive since silver has lagged this year's gold rally by a wide margin.
I wouldn’t take any big bets on currencies until Monday open.
This week's two most unambiguous signals – EURUSD higher, USDCAD lower – need to be confirmed by the market downplaying of risk aversion as US-China tensions simmer. The less obvious but soaking under the surface narrative is the broad USD weaker story via the performance of carry trades, rising EM FX reserve balances and USD selling in the North American time zone. History reminds me when US time zone G -10 traders start to sell the buck on the back of real money flows, it’s time to take notice.
The commodity rally and higher oil prices, along with the Franco-German EU recovery fund proposal, have been the primary drivers of currencies this week. Still, I’d expect profit-taking and position squaring into week’s end to increase as the US-China trade tiff hits the headlines again.
FX traders will likely exercise a degree of caution today after the move on the HKD when a red headline flashed that China NPC was to propose a National Security Law for Hong Kong into end-of-day trade in Asia on Thursday, sending the curve flying.
Synthetic Friday could play into a lot of trading decisions as traders in Europe take today off after yesterday's Ascension Day holiday.
But if pushed for a view today, EURUSD failed to break 1.10 yesterday but momentum is still positive, with higher highs / higher lows over the past few days as the market seems to continue to reduce short positions in the Euro on the back of the Franco-German EU recovery fund proposal earlier this week.
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In January the Fed needed to put the Taper Genie back in the bottle; now they need to convince the short end crew to back off repricing the Fed Funds strip