Ok, I admit it, I use the phrase currency war to get your attention. But you have to admit it – these central banks are firing loose cannons and big bazookas in terms of lowering interest rates and buying bonds (QE), so I know some of you would use that term to describe what is going on in the currency markets.
Central Banks Firing: In the past 2 weeks, we saw surprises from the Swiss National Bank (SNB) and the Bank of Canada (BoC). The SNB was a special case. It suddenly abandoned the euro cap, which caused an inflow to the CHF. However, its monetary policy setting the libor rate in a negative range is dovish, and should eventually make the swissie relative less attractive. The BoC surprised with a rate cut to 0.75 from 1.00, causing the CAD to fall sharply.
The ECB just announced QE at the pace of $60 billion euros a month causing the euro to slide across the board. This has been highly anticipated, so it comes as no surprise. Still, there were doubters out there and since Draghi did not disappoint for the most part, there could be another leg in the euro-decline (instead of a buy-the-rumor-sell-the-news scenario).
When CBs loosen monetary policy, or directly inject liquidity through QE, it depletes the value of those countries’ fiat currencies. Imagine if every central bank started doing this! What will stand in value? – Precious metals like gold and silver. Let’s examine gold priced in USD.
Bullish Trend vs. Falling Speedline: In the compacted daily chart above we can see a market that has reversed 2014’s downtrend, and is now trading around a key psychological level of 1300. It is also basically testing a falling trendline coming down from a resistance pivot in 2013. This falling trendline represents the choppy but still declining price action since 2013. The daily RSI is above 70, showing overbought condition.
Bearish Scenario: Therefore, if we start seeing a bearish divergence with price stalling a bit above 1300, then returning below 1300, we should anticipate a bearish attempt towards the 1255 area, which is where the 200-day SMA and a previous support/resistance area reside.
FOMC is Key: While the rally can be justified by the dovish actions of CBs, it should have a hard time pushing far above 1300 unless the FOMC also delays its rate hike to after mid-2015. Since the XAU/USD is priced in the USD, a dovish FOMC, leading to pressure on the USD, would also be a boost for gold.
Bullish Scenario: If the market does start to “price out” the mid-2015 rate hike with expectation of a delay, then XAU/USD might have a strong chance to stay above 1300 and at least attack the 1345 high from July 2014.
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