Gold Collapses as Traders Contemplate Lasting Bear Trend

DailyFX

  • Dollar Finds a Bid as US Stocks Drop
  • Gold Collapses as Traders Contemplate Lasting Bear Trend
  • Japanese Yen as G20 Warns Against Driving Yen Lower
  • Euro Traders Watch German Vote on Cyprus, ECB Draghi Testimony
  • British Pound Takes Inflation Temperature but Wednesday Heavy Day
  • Australia Dollar Shows Biggest Drop in 17 Months, Biggest Relative Drop in Years
  • US Oil Clears $90, Shifts from Congestion to Bear Market

Range Trade Strategies work best in quiet market conditions - such as the Asia trading session

Dollar Finds a Bid as US Stocks Drop

There is a serious rumbling in risk trends for the global markets, and the dollar will be one of the front-line measures for sentiment moving forward. We know the greenback as the Forex market’s preferred safe haven, but its true appeal is as a ‘currency of last resort’. A move that sees the dollar surge against all counterparts would speak to a disorderly market crunch that reaches beyond regular risk-based trends. Instead, the combination of performance we’ve seen through this past session speaks to a fundamental performance that offers greater follow through potential. From the carry trade angle, the greenback showed the best performance: a 2.1 percent rally against the New Zealand dollar, 1.9 percent versus the Aussie dollar and 1.2 percent when matched with its Canadian counterpart. The fundamentally questionable – but unmatched for liquidity – EURUSD showed a more restrained 0.6 percent dip. It was USDJPY’s 1.6 percent decline – the biggest in six weeks – that real speaks to true risk aversion. The preference for the yen on this pair reflects ‘orderly’ carry unwind rather than systemic panic.

The safe haven watch has begun. In the coming session, we will look to measure the breadth of the financial market’s deleverage from risky exposure. Having seen the dollar climb, yen crosses drop, US equities tumble, the 10-year Treasury yield slide and commodities hammered; there is a uniform effort to avoid risk. The next level of escalation would be to see key technical breaks along with meaningful momentum to fully establish commitment. There are highlights on the upcoming docket that can provide that can tap into confidence including the IMF’s world economic outlook update, a continuation of 1Q earnings season (Goldman Sachs and Intel) and numerous Fed policy officials scheduled to offer up commentary that can further destabilize resolute expectations of unlimited stimulus support.

Gold Collapses as Traders Contemplate Lasting Bear Trend

If you thought gold’s plunge Friday was incredible, the 9-plus percent collapse in the spot price for the commodity Monday left most speechless. On a percentage-basis, that was the biggest drop for the metal in three decades; and notionally ($135), such a move is unprecedented. Put another way, this global standard lost more than one-seventh of its value in just two trading days. Where we go from here depends on two factors: the level of panic behind positioning changes and the fundamental drivers that come in to further back the move. In the current rout, we are seeing more of a disorderly unwinding than a thematic shift that pulls capital away.

The wave of selling seems to have started with a round of large sell orders (institutional exposure) that crossed through the futures market Friday. This push subsequently forced prices below the $1,525 / $1,500 range low that had kept a floor under the market for more than 18-months. It should come as little surprise that there was a significant round of stops for bulls (and short entry orders for bears) just below the well-worn support zone. With futures volume of over 700,000 contracts on the CME, turnover on the follow through move Monday was 50 percent larger than the previous record. In other words, many of those that hesitated exiting gold hoping for a rebound jumped out in a panic. The deleveraging aspect can last for some time given the metal’s colossal rally from 2008 to 2011. However, such a move is more likely to snuff itself out quickly. Concerted and long-term selling pressure comes when gold’s underlying value is damaged. That said, such extreme volatility certainly negates an assets appeal as a viable store of wealth as well as ability to hedge inflation properly.

Japanese Yen as G20 Warns Against Driving Yen Lower

Despite the fact that the yen crosses were running multi-year bear trends through the past year, the 160-pip drop from USDJPY Monday was the biggest since May 20, 2010. What makes this move particularly interesting is that it was a yen-based move that was clearly measured across all its most liquid crosses. The impetus for the move was two-fold. The risk aversion drive reminds FX traders that carry on these crosses is still just off record lows. The more interesting driver is a fresh warning from key G20 members of their displeasure with the BoJ’s yen targeting.

Euro Traders Watch German Vote on Cyprus, ECB Draghi Testimony

Despite the move to deleverage risk exposure and the Euro’s ongoing fundamental troubles, the shared currency managed a relatively mixed session Monday. When the source of consternation isn’t originating with the euro, it seems the market is willing to overlook its quibbles and focus on its liquidity. This detachment may not last however. In the immediate future, we have event risk that includes the German Parliament’s vote on the Cyprus bailout, ECB President Draghi testimony, a Greek bond auction, the ZEW survey and regional CPI data.

British Pound Takes Inflation Temperature but Wednesday Heavy DayAs a relative safe haven for Euro-area investors, the pound found an encouraging capital flow Monday that lifted gilts (UK Government bonds). If this connection is to extend, we will need to see more concerted euro-based concern rather than general risk aversion. In the meantime, fundamental traders should watch the docket. The upcoming CPI data is notable rate speculation, but it’s Wednesday’s BoE minutes that matter.

Australia Dollar Shows Biggest Drop in 17 Months, Biggest Relative Drop in Years

Under a cloud of risk aversion, it should surprise no one that the Australia dollar was under pressure. On a notional basis, the near 200-pip drop from AUDUSD was the largest in 17 months. Yet when we compare this move to the relative price action of the past month, this drop is far more remarkable. When measuring performance on a relative basis (compared to price action over the previous month), this was the biggest tumble in years. As the capital gains behind AUDUSD take a hit, traders will become far more critical of the historically-low carry differential levels.

US Oil Clears $90, Shifts from Congestion to Bear Market

While most of the commodities glory goes to the metals group (gold, silver, copper, etc), the energy sector suffered a hearty slap of its own. US-based WTI crude prices dropped 2.8 percent this past session and are down another 2.2 percent in early Asia trade Tuesday. In the past four trading days, oil has broken a multi-year wedge / trendline and lost nearly 9 percent in value. Another victim of failing risk appetite.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

RBA Policy Meeting Minutes

Slower China Q1 GDP and weak labor market could spur rate cut.

4:00

JPY

Tokyo Condominium Sales (YoY)

-10.90%

Indicative of domestic demand.

8:30

GBP

Producer Price Index Input n.s.a. (YoY)

0.70%

2.50%

Although inflation has been above BOE’s target of 2% for 4Y, BOE’s official Miles recently states that UK is in favor of a tradeoff between high inflation and low unemployment; Therefore, high inflation may not stand as a hurdle to a more aggressive stimulus approach by the BoE.

8:30

GBP

Producer Price Index Output n.s.a. (YoY)

2.00%

2.30%

8:30

GBP

Producer Price Index Output Core n.s.a. (YoY)

1.40%

1.30%

8:30

GBP

Consumer Price Index (MoM)

0.30%

0.70%

8:30

GBP

Consumer Price Index (YoY)

2.80%

2.80%

8:30

GBP

Core Consumer Price Index (YoY)

2.30%

2.30%

8:30

GBP

DCLG UK House Prices (YoY)

2.40%

2.20%

1Y Avg. 2.1; High 3.3; Low 1.4

9:00

EUR

Euro-Zone Consumer Price Index - Core (YoY)

1.40%

1.30%

All set to provide further insight of the possibility more stimuli from ECB; ZEW index may indicate weaknesses in Germany due to bailout issue in Cyprus, loans package extension for Greece and Portugal.

9:00

EUR

Euro-Zone Consumer Price Index (MoM)

1.20%

0.40%

9:00

EUR

Euro-Zone Consumer Price Index (YoY)

1.70%

1.70%

9:00

EUR

Euro-Zone ZEW Survey (Economic Sentiment)

33.4

9:00

EUR

German ZEW Survey (Current Situation)

14

13.6

9:00

EUR

German ZEW Survey (Economic Sentiment)

41

48.5

12:30

CAD

International Securities Transactions ($)

13.34B

Indicator of foreign demand for Canadian securities.

12:30

USD

Consumer Price Index (MoM)

0.00%

0.70%

Speculation has turned towards a moderation of QE3 earlier than the end of 2013. Inflation will add pressure by not define the move.

12:30

USD

Consumer Price Index Ex Food & Energy (MoM)

0.20%

0.20%

12:30

USD

Consumer Price Index (YoY)

1.60%

2.00%

12:30

USD

Consumer Price Index Ex Food & Energy (YoY)

2.00%

2.00%

12:30

USD

Housing Starts (MoM)

1.40%

0.80%

Strong capital inflow in 1Q and housing demand from financial institutions supported the housing market; Impacts from tax hikes and sequestration are closely watched in the industrial sectors.

12:30

USD

Housing Starts

930K

917K

12:30

USD

Building Permits (MoM)

0.40%

3.90%

12:30

USD

Building Permits

943K

939K

12:30

CAD

Manufacturing Shipments (MoM)

0.60%

-0.20%

1Y Avg. 0.2; High 0.7; Low -0.2.

13:15

USD

Industrial Production

0.20%

0.80%

China’s trade deficit could mean more demand for US goods, thereby bolstering the industrial production sector.

13:15

USD

Capacity Utilization

78.40%

78.30%

13:15

USD

Manufacturing (SIC) Production

0.10%

0.80%

22:45

NZD

Consumer Prices Index (YoY)

0.90%

0.90%

Low rate has raised concerns to RBNZ for an overvalued Kiwi; Further rally could spur rate hike.

22:45

NZD

Consumer Prices Index (QoQ)

0.50%

-0.20%

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell 2030 Inflation Bonds

6:15

JPY

BOJ Governor Kuroda Speech

9:00

EUR

German Bundestag to Budget Committee to Vote on Cyprus Bailout

11:30

USD

US Earnings – Goldman Sachs and US Bancorp

12:00

USD

Fed’s Dudley Speaks on Economy

13:00

USD

IMF World Economic Outlook Released

13:00

EUR

ECB’s Draghi Testifies Before Parliament on Bank’s Activities

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.1752

1.7929

9.0974

7.7651

1.2401

Spot

6.4509

5.7383

5.7299

Support 1

12.0470

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3101

1.5448

98.87

0.9419

1.0242

1.0460

0.8510

128.69

151.42

Resist. 2

1.3074

1.5420

98.54

0.9400

1.0226

1.0441

0.8490

128.21

150.95

Resist. 1

1.3046

1.5392

98.22

0.9382

1.0209

1.0422

0.8471

127.74

150.48

Spot

1.2991

1.5336

97.57

0.9344

1.0176

1.0383

0.8432

126.79

149.55

Support 1

1.2936

1.5280

96.92

0.9306

1.0143

1.0344

0.8393

125.84

148.61

Support 2

1.2908

1.5252

96.60

0.9288

1.0126

1.0325

0.8374

125.37

148.15

Support 3

1.2881

1.5224

96.27

0.9269

1.0110

1.0306

0.8354

124.89

147.68

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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