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Gold hits six-week lows on back of stronger USD

Risk sentiment somewhat soured earlier this week after the improvements made throughout the previous week.

Gold will likely not lose steam so easily
- Rudolf Muscat

Major equity indices in Asia, US and the EU slipped lower at the start of the current week. Demand for the euro was limited amid continued speculation on whether Spain will seek a bailout. Even from the US, worse than expected results from Google and Microsoft dragged optimism lower.

Looking back at October so far to date, we have seen that in the forex markets the euro was overall higher and despite registering only marginal gains with the CHF, against the rest of the major counterparts, it was up significantly. The British pound, on the other hand, was overall weaker despite the gains to the JPY, the NZD and the CAD. The Japanese yen was a loser across all of the major currencies losing an average -2.15 per cent at the time of writing.

From the eurozone, the EU summit concluded last week continued to show steps in the right direction, when it comes to increased integration and the banking union.

The bank’s supervisory authority is expected to take shape throughout the coming year and Germany warned that only then will the direct bank recapitalisations take place. EU leaders agreed that the ECB would become the eurozone supervisor.

Over the weekend, regional elections in Spain failed to be any major market mover –Rajoy’s Popular party won in Rajoy’s home region, but overall the results were mixed. Despite this, another Spanish region was reportedly asking for EU aid.

So far, while no supporting news was out for the euro, it managed to hold around the 1.30 region, more on the lack of negative news rather than on positive. Where the EUR/USD currency pair is concerned for the current week, we expect resistance to hold price moves higher in the region of 1.3143-1.3265. To the downside price moves lower should remain supported at 1.2895-1.2769.

In terms of policy decisions from Canada, there was the Bank of Canada interest rate decision earlier this week. Last week, we saw that Canadian inflation numbers for September were slower than expected. These figures were expected to dampen the BoC’s hawkish stance and tightening bias.

However, comments released after the BoC’s rate decisions announcement revealed that while the interest rate remained unchanged at one per cent, as expected, Governor Mark Carney said that higher rates were still “likely required over time”. The Canadian Central Bank retained its tightening bias, but somewhat extended the time frame and made it less definite.

In the US, the FOMC started its two-day meeting on Tuesday, and it was due for its interest rate decision yesterday evening. Given the major policy changes introduced last month, the outcome was not expected to be a major mover – despite still of interest.

Gold hit six-week lows as it slipped to $1706.21 earlier this week, after having hit seven-month highs early in October, when it reached $1,795.99. Gold has slipped 3.64 per cent since the open on October 1. The price of gold reached the fresh highs back on October 5 after a wave of Central Bank stimulus from the FED, the ECB and also China hit the markets.

For the future, even if the global economic recovery continues to gather pace, gold is still expected to attempt higher – while usually improving economic recovery would have reduced the interest for the yellow metal. Even if improved growth comes up, it is still expected to be very gradual and would probably not warranty immediate policy normalisation from the central banks. This is why gold will likely not lose steam so easily.

One will also have to gauge the effects of the upcoming US elections, on November 6, and the effects on the US dollar, given that gold is also priced in USD.

In terms of key levels for gold and considering the current price of $1,713.21, to the upside we expect that resistance should hold the price for the yellow metal at $1733.40 and later at $1,800 – a break of $1,800 would open the door for further upside given this has held back gold prices since November 2011. To the downside, $1,694.20 and $1,662.50 should offer support to selling pressures.

Upcoming FX key events
Today: UK Q3 GDP and US durable goods.
Tomorrow: US annualised GDP Q3 and University of Michigan consumer confidence.

Technical key points
EUR/USD is bullish, target 1.3350, key reversal point 1.2550.
EUR/GBP is bullish, target 0.8220, key reversal point 0.80.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6400, key reversal point 1.5750.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.

[email protected]

RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.

This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.

They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Mr Muscat is a senior trader at RTFX Ltd.

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