Time to buy gold?
Since December, the yellow metal has sharply increased, and is now trading between 1200 and 1250 dollars per ounce. For many people, gold is useless as it does not provide dividends, but still it seems that buying pressures are growing. However, in the last four years, gold has lost more than 30% of its value, and a lower gold price indicates confidence in central bank actions. Ironically, despite massive intervention by policymakers around the world (QEs and low rates) and a risk-off sentiment that dominates, gold has been in constant decline. With regards to the US rate hike, the price of gold in US dollars should have gone down, but instead the opposite has happened. This trend will continue as we firmly believe that the American economy is under pressure.
The price of gold is composed of the physical and paper market. The paper market is far larger compared to the physical market. The ratio is an astonishing 200 vs 1. Most banks issue mainly paper ounces, driving down the price of gold, resulting in a major counterparty risk. In the result of difficulties in the banking sector, the price of paper gold will decrease. However, as physical gold is also included in the overall price, this legitimizes the purchase of physical gold, which is undervalued. Banks are also experiencing massive exposure to derivatives. When we look at the balance sheet of Deutsche Bank (DE:DBKGn) for instance, one can guess how it is possible to be exposed as much as up to 25 times the German GDP. Another important issue is the premium paid for gold on the physical market, and this has never been so high, due to scarcity.
Events will push ECB into easing
German factory orders fell, partially in reaction to a strong 3.3% jump in January and partially as an effect of a stronger euro. Weakness in Europe’s largest economy emphasizes the slow pace of growth, which is expected to decelerate to 0.2% q/q in 2Q. With euro nominal front-end rates above USD, EUR/USD has an interest rate advantage. Europe needs a weaker euro to revive exports, yet the ECB has struggled to revive inflation expectations. As with the BoJ, investors see the limitations to ECB policy, making efforts to weaken the euro difficult. Today ECB will release minutes of its March policy meeting, when it announced new easing measures. The minutes should show a dovish ECB willing to do more to drive inflation and growth in the eurozone, and potentially provide insight into key factors for policy setting. Traders will be searching for clues on the strength of the consensus for the stimulus. We remain constructive on the EUR/USD targeting a break of 1.1459 ahead of key challenge to 1.1495 October high.
China outflows expected to slow
China foreign exchange reserves are expected to fall to their lowest levels in more than four years, as the exodus from yuan has forced the PBoC to tap into reserves to support the currency. However, valuation changes could distort the actual number the PBoC releases. We expect that FX reserves fell by $28.57 billion from the previous month to $3.202 trillion. Yet FX reserves should decline at a slower pace than the previous month and significantly slower than the December drop, which fuels panic speculation. The slower pace indicates the success for PBoC two-way (skew towards appreciation) FX management and refocusing policy action away from FX and interest rates. In addition, the lack of yuan selling suggests greater confidence in the Chinese economy as data has stabilized. There are even fringe reports that the PBoC has stop intervening in yuan markets. Steady improvement in CPI inflation, although mostly effect of higher food prices will further limit the need for interest rate cuts and reduce the USD / CNY interest rate differential, supporting yuan moving forward. We continue to expect CNY to appreciate and end the year around 6.36 against the USD.
EUR/JPY - Sharp Decline
The Risk Today
EUR/USD is strengthening below 1.1400. The pair is now ready to monitor hourly resistance at 1.1495 (15/10/2015 high) while hourly support is given at 1.1144 (24/03/2016 low). Stronger support is located at 1.1058 (03/16/2016 low). Expected to show further increase. In the longer term, the technical structure favors a bearish bias as long as resistance at 1.1746 holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.
GBP/USD's short-term bearish momentum is still on. Hourly supports at 1.4171 (04/01/2016 low) and at 1.4033 (03/03/2016 low) have been broken. Hourly resistance is given at 1.4322 (04/04/2016 high). Expected to show further consolidation below 1.4000. The long-term technical pattern is negative and favors a further decline towards key support at 1.3503 (01/23/2009 low), as long as prices remain below the resistance at 1.5340/64 (11/04/2015 low - see also the 200-day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY's medium-term momentum is clearly negative. The pair has exited its short-term downtrend channel. Hourly support at 109.96 (03/05/2016 low) has been broken. Hourly resistance is given at 109.88 (intraday high) while strong resistance is given at 113.80 (03/29/2016 high). Expected to further weaken. We favor a long-term bearish bias. Support at 105.23 (10/15/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (02/01/2002 high) seems now less likely. Another key support can be found at 105.23 (10/15/2014 low).
USD/CHF has weakened over the last two months. Yet, the pair is now less volatile. Hourly support can be found at 0.9522 (intraday low) while hourly resistance is located at 0.9622 (04/06/2016 high). Stronger resistance can be found at 0.9788 (03/25/2016 high). Expected to show further consolidation. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (01/30/2015 low). The technical structure favors a long-term bullish bias.
