USD/JPY TUMBLES AMID DOVISH MINUTES, TIME TO BUY GOLD?

By Arnaud Masset, market analyst, Swissquote Bank

  • EUR/USD may trade range bound again between the 1.1310 support and the 1.1438 resistance as traders are wondering whether further dollar weakness is sustainable
  • USD/JPY reaching its lowest level since October 2014 and the BoJ, unhappy with the current yen’s strength, further reduces the odds of the Japanese economy reaching the 2% inflation target. On the downside, the next support can be found at 105.23
  • We therefore expect Governor Kuroda to take action to put an end to the yen rally either by expanding the Qualitative and Quantitative Easing program and/or by cutting rates further into negative territory
  • Nonetheless, the 1-month USD/JPY risk reversal shift to -1.48 on Thursday showed that traders rushed to buy protection against further yen strengthening as they do not believe the BoJ has the tool or the credibility to remedy the situation
  • CAD and the NOK took advantage of the crude oil rally, both surging against the greenback. USD/CAD continued to reverse early week gains moving closer towards 1.30
  • Gold: Buying pressures are growing
  • With regards to the US rate hike, the price of gold in US dollar should have gone down but instead the opposite happened. This trend will continue as we firmly believe that the American economy is under pressure and that there is no current ongoing intervention.

As expected the March FOMC minutes were roughly in line with the remarks made by Janet Yellen during the press conference following the release of the rate decision. However, the minutes further dampened the market’s sentiment towards the greenback by highlighting the growing divisions among Fed members, especially concerning a potential rate hike in April. We can now also certainly rule out an April rate hike. EUR/USD held ground above the 1.14 threshold after testing 1.1392 in Tokyo. Over the last few days, the pair has traded range bound between the 1.1310 support and the 1.1438 resistance with traders wondering whether further dollar weakness is sustainable.

The Japanese yen surged massively against the USD amid the release of the FOMC minutes with USD/JPY reaching its lowest level since October 2014. USD/JPY fell more than 13% since June 2015, down to 108.95 from 125.86. The BoJ is most likely unhappy with the yen’s current strength as it further reduced the odds of the Japanese economy reaching the 2% inflation target. We therefore expect Governor Kuroda to take action to put an end to the yen rally. This could be done either by expanding the Qualitative and Quantitative Easing program and/or by cutting rates further into negative territory. The 1-month USD/JPY risk reversal shifted to -1.48 on Thursday as traders rushed to buy protection against further yen strengthening, suggesting that investors do not believe the BoJ has the tool (or the credibility?) to remedy the situation. On the downside, the next support can be found at 105.23 (low from mid-October 2014), while on the upside a resistance can be found at 110.81 (high from April 5th).

Crude oil extended gains in the late European session as US stockpiles contracted unexpectedly during the week ending April 1st. Crude inventories contracted by 4937k barrels, while the market was expecting an increase of 2850k. Inventories increased by 2299k in the previous week. West Texas Intermediate crude futures rose to $38.16 a barrel on the New York Mercantile Exchange, up 8.15% from Tuesday’s low. The global benchmark, the Brent crude, passed the $40 threshold, up 7.75% over the same period. Overall, commodities gained ground in Asia with gold and silver surging 0.49% and 0.47% respectively. Iron ore active contracts on the Dalian commodity exchange were up 0.95%, while palladium and platinum rose 0.06% and 0.46% respectively.

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The CAD and the NOK took advantage of the crude oil rally, both surging 0.33% against the greenback. USD/CAD continued to reverse the early week gains as it moves towards 1.30. On the downside, a support lies at 1.2858 (low from March 31st). USD/NOK tested the 8.2528 support once again but the number of sellers was not sufficient to break it to the downside.

Yann Quelenn, market analyst: “Time to buy gold? Since December the yellow metal has sharply increased and is now trading between 1200 and 1200 dollars per ounce. For many people, gold is useless as it does not provide dividends but still it seems that buying pressures are growing. However, in the last four years, gold has lost more than 30% of its value and a lower gold price indicates confidence in central bank actions. Ironically despite massive intervention by policymakers around the world (QEs and low rates) and a risk-off sentiment that dominates, gold has been in constant decline. With regards to the US rate hike, the price of gold in US dollar should have gone down but instead the opposite happened. This trend will continue as we firmly believe that the American economy is under pressure and that there is no current ongoing intervention.

The price of gold is composed of the physical and paper market. The paper market is far larger compared to the physical market. The ratio is an astonishing 200 vs 1. Most banks issue mainly paper ounces driving down the price of gold, resulting in a major counterparty risk. In the result of difficulties in the banking sector, the price of paper gold will decrease. However, as physical gold is also included in the overall price, this legitimises the purchase of physical gold which is undervalued. Banks are also experiencing massive exposure to derivatives. When we look at the balance sheet of Deutsche Bank for instance, one can guess how it is possible to be exposed as much as up to 25 times the German GDP. Another important issue is the premium paid for gold on the physical market and this has never been so high due to scarcity.” —

Today traders will be watching foreign currency reserves from Switzerland; industrial output from Spain; budget balance from Sweden; Halifax house price from UK; industrial production from Norway; manufacturing production South Africa; building permits from Canada; initial jobless claims from the US.

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