The U.S. Dollar managed to hold on to its gains despite the strong rally in the gold market. While the weaker Dollar has been blamed for the August to October rally in gold, stronger gold is not expected to drive the Dollar to new lows. The fundamentals have shifted. The Dollar is getting stronger because of investor aversion to risk while gold is up because of central bank demand.
Trading has been thin and rangebound this week ahead of Wednesday's Fed meeting and Thursday's European Central Bank and Bank of England meetings. Investors are looking for the Fed to leave interest rates at historically low levels, but it may reveal a few hints as to how it plans to exit from its stimulus programs. Interest rate traders are betting that the Fed will not hike rates until sometime after April.
The European Central Bank is expected to leave its benchmark interest rate at 1%. Its statement should reiterate its concern that stimulus should remain in place until the global economy begins to show a sustained recovery.
The Bank of England is the wild card this week. Although it is a given that the BoE will leave interest rates low, no one is certain how it will deal with its asset purchase program. In September, the BoE increased funding for the program. This sent the Pound sharply lower. Since then the Pound has recovered from its lowest level but 3rd quarter GDP was negative. Speculators are betting that the BoE will extend but not increase the program.
Tuesday, the Dollar opened up higher based on a strong overnight trade. The Dollar gained strength after the Reserve Bank of Australia hiked its benchmark interest rate by 25 basis points. This was expected by traders, but the guidance offered by the RBA suggested that additional rate hikes were not in the near-term picture. Both higher yielding and commodity based currencies weakened on the news.
Investors were more risk averse today. Fear is high as evidenced by stronger gold and a higher VIX volatility index. Investors are worried that a recovery in the U.S. economy will lead to Fed action which strips the economy of stimulus money. This pressure would most likely put an end to the aggressive speculation in higher yielding, higher risk assets.
The EUR USD traded sharply lower after trading inside of a tight range for the past four trading sessions. Traders expect the European Central Bank to leave its benchmark interest rate unchanged at 1%. In addition, the ECB is expected to say that stimulus plans will remain intact until the economy starts to show signs of a full recovery.
Pressure was on the GBP USD this morning, but a strong surge in gold helped the Pound erase some of its early losses. Speculators are looking for the Bank of England to leave interest rates at historically lower levels while extending its asset purchase program.
The holiday in Japan helped to keep the USD JPY in a tight range. Aversion to higher risk assets is helping to bring investors back to the Japanese Yen. Thin conditions in the U.S. stock market helped contribute to a choppy trade today.
The USD CHF rallied sharply higher overnight and held on to most of its gains. The main trend turned up on the daily chart when the market crossed 1.0285. The quick pop to the upside today may have put this market into overbought territory. Look for a two-sided trade at 1.0285. If support can be established at this price, then look for the rally to continue. Profit-taking can drive the market back below this level but not damage the uptrend.
The USD CAD opened higher, but the inability to break through yesterday's high and the strong surge in the gold market encouraged selling. Higher metal prices and crude oil are good for the Canadian economy. If downside momentum continues, then this market could correct back to 1.0522 over the near-term.
The guidance offered by the Reserve Bank of Australia suggests that interest rates will remain stable for the next few months. This news put pressure on the AUD USD, but the market still remained inside of yesterday's range of .8905 to .9121. The longer this market stays in this range, the greater the impending volatility.
The NZD USD traded flat most of the day until the rally in gold proved too much for the bears to take. Although this market strengthened throughout the day it still remained inside of yesterday's .7081 to .7267 range. Regaining a 50% price at .7159 is supportive for a follow-through rally tomorrow. This price should act as a pivot and control the short-term direction of the market.