Market movements so far today have been much calmer than they have been in recent days. Gold seems to have made a temporary base at $1,322- the low from yesterday – and has staged a fairly impressive recovery so far today. It managed to break above this morning’s prior high at $1,380 and is now testing $1,1400. A period of consolidation is to be expected, after all the market can’t continue to drop $150 per day indefinitely. So what should we make of the extremely aggressive sell-off from yesterday?
There are a few reasons doing the rounds trying to explain why gold sold off so sharply: 1, it’s a reaction to weak global growth and deflationary expectations, 2, it was down to gold market dynamics, with too much ETF money involved making a precipitous decline more likely, 3, it was due to a forced liquidation (the here-say part). If the sell-off was down to the last point then it could be a short term event and we could see a more prolonged recovery in gold.
The multiple reasons why gold sold off …
Regarding the other points, it seems strange to me that people just decided that growth was weak and inflation was not a threat in the last two days. Added to that, while Chinese Q1 GDP disappointed, the economic picture in the US is very cloudy and not that clear cut. For example, today we saw weak inflation data, we saw annual core inflation fall to 1.9% from 2% in February, yet we saw housing starts for March surpass 1 million per month, its fastest monthly pace of growth since 2007. Thus, it is hard to pin the “cause” for the gold price decline on any one fundamental reason. It may have been nervousness over global growth or it could have been investors desire to dump low yielding gold in favour of higher yielding stocks, combined with liquidations and then combined with a technical move – once we surpassed $1,525 there just weren’t any buyers to help support the downside.
Gold – where to next?
It’s better not to overthink this move and instead try to base your future actions on price. Key resistance in the short term lies at $1,425 – a resting zone in the middle of yesterday’s sell off – then $1,455. A medium-term resistance zone is $1,525-30 – the prior 12 month lows before yesterday’s sell-off - which is now key resistance. The “recovery” in gold is not unexpected, commodities have a reputation for volatility because they can overshoot and undershoot to the upside and downside. Overall, we think that gold is in for a period of consolidation and don’t think gold will get back above $1,525, because the move lower in the last few days was so sharp. However, a break above $1,455 would be a bullish development for this cross, which suggests a deeper recovery.
Yesterday’s healthy clear-out
The FX space is also in recovery mode today. We have seen the euro recover and the yen fall back after attracting safe haven flows during yesterday’s gold rout. USDJPY has been picked up on the dips and is back above 98.00, 97.20, reportedly, attracted some serious buying interest earlier. If we can get above 98.70 – the high from Monday - then we could be back on our way to re-test 100.00. You could argue that the clear-out in markets yesterday got rid of weak shorts and is a healthy move in the markets that could lead to a more solid move back to 100.00 in USDJPY. Likewise, if the gold sell off was partly triggered from weak investors who can’t afford to hold gold during a sell off because of margin call requirements etc., then it may spur a more solid recovery in the precious metal.
AUD and NZD – shaken, not stirred …
Commodity FX was also affected by the sell-off yesterday. Interestingly, both crosses held important support. In AUDUSD 1.0250 – the base of the daily cloud – held as key support, while in NZDUSD 0.8360 – the top of the daily cloud – also held as support. This suggests that even though these crosses were shaken, they were not stirred, and yesterday’s price action does not herald the start of a new trend. Watch out for New Zealand CPI released tonight at 2345 BST. The Q1 inflation figure is expected to rise by 0.5% on the quarter, 0.9% year on year. Although we doubt Q1 saw excessive inflationary pressure, any upward surprise could help NZD in the short term. Key resistance levels to watch include: 0.8520 then 0.8560. Overall, in the current environment commodity bloc currencies could be more affected by market sentiment.
Earlier, UK CPI was in line with expectations, although German ZEW was much weaker than expected falling to the lowest level since January. Economic data was mostly brushed off by GBP and EUR, which is benefitting from the overall boost in market sentiment. For the rest of the session, we expect the recovery to continue and for stocks to gradually recover after their worst performance in 2013 yesterday.
One to Watch: NZD USD – see above.