Gold benefits from weak USD, WTI continues to fall
Gold exploited the continual mixed sentiment towards the Dollar on Monday, with the metal rallying around $20 to $1192. The weak USD sentiment is the reason for the Gold rally, although investors may be looking towards safehaven assets as a result of a potential Greek default at the end of the month. However, the most likely reason for the jump in Gold is the weak USD, and traders are currently showing no interest in the major currency despite an imminent FOMC decision. While the chances of the Federal Reserve raising US interest rates are extremely slim, traders might be tempted to buy USD on the outside chance that the Fed might shock the financial markets with a rate rise. It is more likely that the US central bank will finally provide the necessary clarity to investors on when they will be raising interest rates, however Gold bulls are currently discounting the potential for this and enjoying momentum.
Although weak USD sentiment is providing Gold bulls with a boost, one commodity that is failing to receive any benefit is WTI Oil. The price of WTI has dropped by close to $3 in just three days to $58.72, which could be linked to the aftermath of OPEC leaving production levels unchanged just a week ago and that oversupply concerns will continue to be a dominant theme, making buyers hesitant towards the commodity. But the recent International Energy Agency (IEA) report that although demand for the commodity is increasing, OPEC supply is now at its highest level since August 2012, may have also weighed on investor sentiment.
While we have now encountered a significant correlation between declining US oil rigs and reduced weekly inventory surpluses from the United States, increased production from OPEC will outweigh any such reduced supply. Investment in oil production throughout the Middle East is on the rise and it has become clear that OPEC is willing to bypass the depressed oil prices, because this provides an opportunity to begin regaining vital market share. For those economies reliant on commodity prices, indications that they are set to stay low will result in repeated pressure on their commodity-linked currencies. This is something that will be noticed globally, with this stretching to the New Zealand Dollar, the Malaysia Ringgit and Russian Rouble.
Speaking of Russia, the rouble strengthen against the Dollar on Monday despite the Central Bank of Russia (CBR) cutting interest rates by 100 basis points to 11.5%. There seems to be some surprise that the USDRUB declined to 54.33 after the interest rate cut, but the CBR cutting rates six months after erratically raising them on several occasions to prevent capital outflows is a positive move. The CBR is clearly more confident and the markets feel positive that lower rates will enable the economy to withstand any downside pressures, with this being the likely reason why the rouble advanced after the rate cut.
In Europe, all attention remained on Greece talks and it will continue to do so since we are now only two weeks away from a possible Greek default. There is no doubting that Athens is desperate for cash and needs a deal to be reached sooner rather than later, although this is unlikely to happen soon and the markets are beginning to factor Greece risks into European stocks. This can’t be said for the Euro though, which appreciated to 1.13 against the USD as a result of the weak Dollar sentiment with this meaning traders are probably going to enjoy another opportunity to sell-on rallies with the EURUSD currently looking over extended.
Unless there is some serious widespread and lengthy Dollar weakness, there is no justification for the EURUSD to be trading at 1.13. The constant and ongoing Greece risk is enough of a reason to say the currency is vulnerable to downside pressures, however the recent dovish comments from both Angela Merkel and the ECB’s Coeure at the same time the currency pair was previously at this level provides further reason to expect a decline at some point. While the markets are rightly concentrating on Greece risks, the dovish comments from senior leaders suggests that there is some unease around Europe over the prospect of the recent Eurodollar appreciation.
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