Precious metals explode higher again, leading USD lower

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SUMMARY

ANALYSIS

USDCAD

Another explosive 7% surge for spot silver and a new record high for gold prices are driving the USD broadly lower again to start the new week.  We continue to believe that this precious metals rally is being driven by increasingly bullish supply/demand dynamics in the physical market, the ongoing downtrend for real US yields (rising inflation expectations), and speculative momentum following key technical breakouts for both gold and silver over the last week…not because of increased US/China tensions or the worsening US COVID situation.  Well known fundamental narratives about why the USD should be valued lower than it is are also getting more air time than usual amidst this precious metals breakout (given the traditional inverse correlation between gold/silver and the dollar) and we think this is adding fuel to the broad USD selloff over the last few days.  All this should make for an interesting setup going into this Wednesday’s FOMC meeting.  The Fed’s worries about the recovery (reason for the USD’s bounce after June’s Fed meeting) are now arguably priced in and could traders now be re-positioning for the “major policy change” that Bloomberg hinted at with its trail balloon article on July 17?  See here.

This morning’s slightly better than expected US Durable Goods numbers for June (+7.3% vs +7.0%) were a non-event.  Dollar/CAD is now trying to bounce of the familiar 1.3380-90s support levels as gold and silver prices ease off session highs.  The latest Commitment of Traders report released by the CFTC showed the leveraged funds jumping back into USDCAD short positions during the week ending July 21; positions that they had liquidated the week before when the market inched back above 1.3600.  They are still positioned uncomfortably net long USDCAD though in our opinion, which tells us that the “pain trade” is still lower for USDCAD.

USDCAD DAILY

USDCAD HOURLY

SEP CRUDE OIL DAILY

EURUSD

Euro/dollar continued its rally overnight as another precious metals breakout in Asia propelled the market higher through chart resistance in the 1.1650-60s.  Weekly chart resistance in the 1.1760s was the next stop for EURUSD prices and we’ve since seen the market pull back a bit as gold and silver prices cool off…but the market’s momentum is clearly higher now.  This morning’s better than expected German IFO Expectations number (97.0 vs 93.7) produced a nice fundamental narrative to go along with today’s EUR rally, but it wasn’t a driver of price action.

This week’s European calendar won’t be that eventful (Germany’s employment/CPI reports for July + German Q2 GDP on Thursday), and so we think Wednesday’s Fed meeting will be the overwhelming focus for traders.  The funds increased their net long EURUSD position to a new two-year high during the week ending July 21, and are probably even longer at this point (considering the 200pt rally since last Tuesday).  So far this overcrowded bullish EUR positioning has not been detrimental to the market as these longs continue to get paid.  Large option expiries are non-existent for EURUSD at these levels, which could  easily make for a trend-extension-type move should the Fed unleash a dovish surprise this week.

EURUSD DAILY

EURUSD HOURLY

SPOT GOLD DAILY

GBPUSD

The leveraged funds shockingly added to their net short GBPUSD position during the week ending July 21, just as GBPUSD was breaking above the 1.2630-50s resistance level.  We think this mis-timed bearishness, Friday’s firm NY close above the 1.2750s, and the continuation of the explosive gold/silver rally is what explains sterling’s confident breakout above the 1.2800 mark in overnight trade today.  Brexit negotiations resume again this week but we have a feeling that only positive soundbites will have an effect on this market given how bearish the news has been of late.

 
GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

Those much needed Aussie buyers showed up in Asia last night when the gold and silver markets continued their upside surges, as so this has taken the downside pressure off AUDUSD chart support in the 0.7070-80s for now.  Off-shore dollar/yuan has also pulled swiftly back off the 7.03 resistance level, which tells us the “US/China escalation” narrative from last week has been a bit over exaggerated.  The leveraged funds trimmed their net long AUDUSD position back to flat during the week ending July 21 nonetheless, right as AUDUSD was breaking out, which tells us the Australian dollar bulls are getting a little nervous here.  Australia will report its Q2 CPI numbers at 9:30pmET tomorrow night.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen bounced off 105.60s trend-line chart support on Friday afternoon, but this level gave way quickly last night when gold and silver prices resumed their march higher.  The leveraged funds added marginally to their net short USDJPY position during the week ending July 21 and we suspect they have not chased the move lower since due to the two Japanese holidays we had on the calendar last week (which means the current JPY length won’t look overextended).  We’re sorry but the sharp downward move we’re witnessing in USDJPY over the past few trading session is not due to risk aversion and a preference for the safe-haven JPY like so many analysts are saying…what we’re seeing here is a precious-metals driven sell-off in the broader USD…plain and simple.    

USDJPY DAILY

USDJPY HOURLY

US 10-YR YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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