Not by much, but the single currency registered a fresh 2yr low yesterday as the bears continue to hold sway over short-term direction. Contributing to the defensive tone was a suggestion from the German constitutional court that a final decision on the legality of the ESM would likely be delayed. In addition, the IMF forecast that Italy’s fiscal shortfall and debt/GDP ratio would climb both this year and next. Against other majors the euro also continued to slide – for instance, EUR/GBP is now below 0.79, EUR/AUD is at 1.20 (in late 2008 this cross was trading above 2.00), and EUR/JPY is at 97.35. For now, the forex market simply cannot shake its fundamental negativity towards the single currency. Elsewhere, cable is holding firm around the 1.55 level, the yen is in reasonable shape ahead of the outcome of this morning’s BoJ meeting, and gold has partially recovered after slipping from above USD 1,600 to USD 1,565 yesterday afternoon (see below).
Gold putting up a fight. Interesting over the past couple of months is just how frustrating a time it has been for the gold bulls. Both the 20d and 60d moving averages are within 0.5% of the current spot price, not something we’ve seen for a year now. Furthermore, spot has traded within a 6% range for nearly three months. This is a real change for gold, which through most of the credit crisis has been an integral part of the ‘risk-on, risk-off’ ebb and flow. Or in other words, such a period of consolidation goes against the grain of the volatility normally associated with an asset which is all about capital return and no yield. Also worth noting is that once again global ETF holdings of physical gold have been rising for most of the past six weeks and are just below the high for the year, according to data compiled by Bloomberg. Naturally, this is not the complete market, but it does suggest that beneath the recent moribund price action there is a growing belief that the price will move higher. This can also be seen in the weekly CFTC net non-commercial futures data, which have been climbing again from the past month’s year lows in long positions. Furthermore gold’s correlation (inverse) with the dollar has been falling of late, reflecting an underlying resilience on the part of the yellow metal to the move to new highs on the dollar index for the year. All this suggests that gold may be down, but it’s certainly far from out.
Aussie’s fortunes hang in the balance. From a purely directional perspective, anticipating the Aussie’s next big move at this juncture is more problematic than usual. Those of a bearish persuasion continue to focus on a combination of domestic and international forces. Regarding the latter, global growth expectations continue to be revised downwards, as the IMF recently affirmed. Europe’s sovereign debt and banking crisis is still hanging over the global economy like a dark cloud, resulting in considerable hesitation on the part of financial decision-makers. In addition, China’s growth picture looks much less assured these days, a development that really matters down under because the mining sector is so incredibly reliant on demand from the world’s second largest economy. Domestically, the economy has wobbled over the past year, with the non-mining sector in recession and even the mining sector now concerned about forward demand. In response, the RBA reduced rates by a cumulative 75bp in May/June; much more is expected from the bank in the second half of this year. Business confidence remains subdued - especially in the mining sector - and company employment and investment intentions are cautious. Also of concern for the Aussie bears is the deterioration in the technical picture. After briefly penetrating both the 100d and 200d moving average last week the AUD has rather quickly dipped back below these key technical chart-points. There was a similar challenge to these two critical moving averages in late April when again there was rapid rejection. For those who believe the Aussie’s glass is half full, the sharp recovery in June from highly oversold levels was encouraging. Buying interest over recent weeks has been both healthy and diversified – exporters were very keen below parity, as well as sovereign wealth funds (which continue largely to avoid the euro in terms of new money) and real money managers. Australia retains a very lofty sovereign debt rating which is providing the currency with considerable underlying buying support in a world where the ranks of top-rated sovereigns is thinning rapidly. Also, some recent indicators suggest that the economy might be holding up better than expected. First-quarter GDP was well above expectations and employment growth in the first half was remarkably decent. Finally, traders reversed their very painful shorts last month, and are now much more neutrally-positioned. As such, the Aussie is developing into a proper arm-wrestle, one that may not be resolved any time soon.