Gold & Yen's Perfect Desert Storm

by Ashraf Laidi
Nov 27, 2009 16:51 | 404 Comments

Gold not soTough Against the Others

One striking development involving gold is the failure to regain its previous record highs against the robust yen and Aussie. Most importantly this week, gold did reach new highs against the euro, sterling and Swiss franc, yet will ultimately fail to close the week above those highs. The fact that gold was unable to close the week at new highs against these currencies, simultaneously with the unfolding global market sell-off, highlights the importance of gauging the secular momentum of the precious metal beyond in USD terms currency. Therefore, as gold steals the headlines via its performance against USD, it is helpful to scrutinize its performance against more robust assets (currencies) for a truer reflection of its ascent.

Gold & Yen's Perfect Desert Storm - Goldfxnov27 (Chart 1)

While the above analysis does not constitute a negative signal on gold, it sheds light on the preliminary signs of a temporary consolidationeven against the greenback. For more details on multi-FX approach to golds performance, see Chapter 1 of my book Currency Trading & Intermarket Analysis

Oil/EURUSD Ratio Warning Signal

Last week, we used the Oil/EURUSD ratio as a warning signal for oils eroding ability to maintain its gains with dollar weakness. Since then, the Oil/EURUS Ratio fell to 47 from last weeks 52, exposing the speed of the fuels decline relative to the rise in EUR (and the falling USD). Oils weakness despite recent USD damage highlighted oil speculators inability to drive up USD-carry trades, which was no different from US equity indices inability to regain those important retracement levels (10,335 Dow & 1,120 S&P500). And so we concluded that oil would be a major victim at the next bout of risk aversion. Today, oil plummeted by as much as $5/barrel to a 7-week low of $72.50. While we may see a rebound to as high as the 21-day MA of $78, the string of 6 (six) consecutive lower highs on weekly oil remains a solid case for the bears.

Gold & Yen's Perfect Desert Storm - Oileurnov27 (Chart 2)

Yen's Perfect Desert Storm

The Yens Perfect Storm escalated overnight amid the combination of unexpected decline in Japanese unemployment and falling global equity futures following the Dubai fallout. FX traders shall be eager to find out how Japanese officials will follow up on their threats to stabilize their soaring currency in the midst of the latest bout of global risk aversion, which was bound to emerge considering equity indices largely-dollar driven gains. Chances of a successful yen-selling intervention (success = prolonging yen weakness) would largely depend on officials ability to stabilize falling world bourses, rather than the volumes of actual yen selling. And thus, it would be irresponsible to assume that yen-bound FX flows (new speculative yen longs & unwinding of yen shorts) be halted at a time when risk appetite has been violently shaken by a new source of event risk (Dubai fallout rather than the usual suspects of weak US macro, US/UK banks or Eastern European banks).

The yen signals were all here. Readers of this website were flooded with warnings about yen strength here and here as they were reminded on the changing face of the carry trade, whereby the US dollar had replaced the yen as the main funding currency to these trades (courtesy of the Feds dovish rhetoric), especially after US dollar 3-month LIBOR fell below its JPY counterpart in August, for the first time ever in August. The yens diminishing role as a funding currency was also a result of the Bank of Japans announcement to end purchases of corporate debt by year-end. We also constantly reminded readers of yens outperformance against all currencies in each of the last four Fridays.

Can Japan Learn from US How to Weaken its Currency? Aside from threatening at coordinated intervention action (central banks selling the yen), Japanese officials can take a page from the Federal Reserve and resort to fresh liquidity injections. One way would be for the Bank of Japan to reverse last months decision that it would halt purchasing corporate debt beyond year-end. Markets must also be aware of the emerging rift between the Japanese Ministry of Finance (new political power), criticizing the Bank of Japan (appointed & approved by LDP) and the central banks rosy forecasts. Thus, Japanese bureaucrats may continue talking down the currency, but as long as the BoJ remains insistent on gradually exiting its strategy of emergency liquidity measures & issuing brighter economic outlook, yen downside would remain limited--especially if the Dubai Debt fallout is accelerated in world bourse via year-end profit-taking.

SEE YESTERDAY'S CHART ANALYSIS DRAWING ATTENTION ON THE DJIA RELATIONSHIP WITH THE SHANGHAI COMPOSITE INDEX, AND HOW LOSSES IN THE LATTER, WILL INEVITABLY PAVE THE WAY FOR THE REQUIRED RETRACEMENT IN THE DJIA. Eventually, Shanghai went on to lose 2.4% on Friday and the Dow losing 1.3%. The Shanghais outside bearish week suggests more losses next week.

For more frequent updates and trades, subscribe to our Intraday Market Thoughts and and join our expanding followers on twitter twitter.com/alaidi

Comments (Showing latest 10 of 404) View All Comments
zwan
qamishly, Syria
Posted Anonymously
9 years ago
Feb 22, 2010 23:04
thank you ashraf for every thing
montmorency
Abingdon, UK
Posts: 610
9 years ago
Feb 22, 2010 22:54
@Ashraf: Thanks for good advice on retracements, margin usage, etc. This is a tough lesson for the newer trader to learn (and I am still learning). As for not selling the lows and not buying the highs, that's even tougher for the newer trader. There is a great temptation to assume after a good rise or a good fall that it will just keep on going (and occasionally it does). But more often than not (as far as I can see) it doesn't, so getting a feel for that market rhythm is a big part of the battle.
"Let the market come to you" is a lesson I have taken a long time to learn, and I still get it wrong many times.
Ashraf Laidi
UK
Posted Anonymously
9 years ago
Feb 22, 2010 21:44
hmmalik, if you sold CADJPY at 87.86 then i hope you took profit at 87.40 (as i said on twitter). i also said on twitter 87.50s remain attarctive short point.

Ashraf
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Feb 22, 2010 21:41
pipped, surely not call of the century. but if not by end of this week then by end of next week i.e. before March 6th,

There are some people out there who sold eurusd at 1.3560 on the basis of my article calling for 1.32. if you are going to short a significant amount of euros at 1.3560 to the extent that you get stopped out or max out your margin when euro retraces to 1.3630, then you should forget about FX margined trading and start learning about risk management and conservative account management
. If you cannot survive a retracement of 100 or 150 pips against you then ..again...this market is not for you.

it is important that you have sufficient margin cushion to withstand these retracements. many traders started to panic last week when GBPUSD retraced to 1.5815. They shorted at 1.5580s. Some of them got stopped out at 1.58 before the market fell back to 1.5360 but they could not do anything because they had no money. I am NOT saying thet everyone must allow the market to go against them by 300 pips. I am saying that when i call for a move in the market I allow myself that much room. And if you choose to follow that, then go ahead. But do not go selling at the lows and buying at the highs with ridiculous margin usage. use less than 12% or 15% of your account and things should be easier.

i hope i made myself clear.

Ashraf
PippedOff
Canada
Posted Anonymously
9 years ago
Feb 22, 2010 21:07
Ashraf just reiterated his call for 1020 Gold on a tweet.

And by the END OF THE MONTH.

this is the CALL OF THE CENTURY.

WEATHERMEN ANALYSTS pounding the table for HIGHER Gold.
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Feb 22, 2010 17:04
Yuwono, BE CAREFUL IN BELEIVING THE HYPE !. gold does NOT always go up when stocks go down. And when i speak about falling stocks/ratio, it can still happen with both moving lower..but at varying extent.

Ashraf
Yuwono
Jakarta Utara, Indonesia
Posts: 5
9 years ago
Feb 22, 2010 16:50
Last week eurusd, gbpusd made new low, and usdchf made new high, while audusd no, and gold ranging 1090-1127.
Does it mean audusd and gold will outperform?
Coz they wait RBA hike rate, while gold hold its support coz greece issue make gold shine as safe haven and coz The fed start to fight inflation?
klevera
seoul, Korea Sout
Posts: 51
9 years ago
Feb 22, 2010 12:31
I was expecting gold&silver&oil to go up today but they are under selling pressure. Pippedoff right on!
I don't find any fresh news though
montmorency
Abingdon, UK
Posts: 610
9 years ago
Feb 22, 2010 12:19
Interesting piece from Money Morning (Moneyweek email). Basically says that because the money supply is not growing in spite of QE, the money supply is actually flat or reducing. The money is disappearing into the "black hole" of the banks. Therefore the stock market rally is going to run out of cash sooner or later. So they are bullish the USD, and bearish Euro, and also GBP. However, they are bullish gold (they always are though).

Can't give you a link, but here is one quote:

"The trouble is, says Dannhauser, that this cant last. If the money supply isnt expanding, then at some point, the rally will simply run out of cash to fuel it. A sustainable bull market requires consistent growth in the supply of money without growth in the money stock, any excess cash will quickly be used up and the rally will stall. "
hmmalik
Canada
Posted Anonymously
9 years ago
Feb 22, 2010 11:40
ashraf

what is next target for cad/jpy
i have just sold cad/jpy@87.86

regards
hmmalik