Gold ben­e­fits from weak USD, WTI con­tin­ues to fall

Financial Mirror (Cyprus) - - FRONT PAGE -

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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