This week, we’ll revisit the macro relationship between the gold and the U.S. Dollar Index. Then, we’ll examine the divergent trading behavior in the gold market between the large speculators who’ve recently set a new record position, and the commercial gold hedgers who are clearly happy to sell all of the forward production they can above $1,300 per ounce. Finally, we’ll discuss the relative and quantitative models based on the Commitments of Traders data that leads us to believe that the large speculators may be giving themselves too much credit for their recent success.
The Euro has been range bound for nearly 18 months; stuck between $1.06 on the low side and roughly $1.17 on the high side. While the Euro remains stuck, now trading a little over $1.10, there has been growing interest by the commercial traders to own the Euro following the Brexit vote.
The Australian Dollar has slid nearly 9% in just the last month. We were exceptionally suspect of the rally that took place between February and April, as we didn’t see commercial trader confirmation of commodity demand, Australia’s primary industry, supporting higher commodity prices going forward. In fact, our data sources made us suspect of the entire metals and energy rallies we’re currently seeing come to an end. This is one of the primary values of tracking the Commitment of Traders (COT) report. It provides a tally sheet for fundamental supply and demand. Recently, we’ve seen some commercial traders nibbling at the long end of the Aussie Dollar and, given its recent decline, we feel it is due for a tradable, short-term pop.
The Japanese Yen’s rally since their move to negative interest rates has been an economic phenomenon that I simply can’t get my head around. Perhaps a case of the government not taking more is akin to losing a foot rather than the entire leg? I suppose my lack of understanding is one of the reasons I follow the collective actions of the commercial traders in the commodity markets. While any individual can be wrong at any given moment, the commercial traders, as a group, have a knack for having the right position on at the right moments. Whether by research or algorithm by hook or by crook, there is little question in our minds which group we should be following. Today, we’ll update you on their most bearish position in the Japanese Yen in more than six years.
We’re swing traders, rarely holding a position more than two weeks. Even so, it’s important to understand the macro environment of the market being traded. The idea is to predict volatility expansion and market surprises in the correct direction, thereby providing a profit taking opportunity. Given the tremendous disagreement on the Federal Reserve Board’s expected actions by the general public and within the Board itself, it makes the likelihood of volatility expansion following next week’s unemployment numbers much more likely. Furthermore, it’s possible that the market could be handed consecutive reports pushing the market in the same direction, rather than instantly reversing course as has been the recent case with any two reports. This combination could push the Dollar through the last year’s resistance making the current weakness an opportune buying moment.
We’ve been watching the Japanese Yen’s movement closely this year as it has gained strength against the U.S. Dollar in spite of the actions of the Bank of Japan and their explicit commitment to weakening their currency across global markets in order to prop up their export driven economy. We’ll refer to our story from two weeks ago to provide the deeper history. In the meantime, we’ll update a few data points that should continue to keep you watching for a dramatic turn in the Japanese Yen vs U.S. Dollar currency pair.
The Japanese Yen has rallied more than 6.5% since the their finance minister, Katayama Yano announced Japan’s shift to a negative interest rate in their latest battle to destroy their currency and create external demand thus allowing them to finally achieve their expressed desire of 2% inflation year over year. The Yen fell initially on this news but the ensuing rally has been a bit puzzling. Based on the Japanese government’s actions and intentions, we’ll chalk this up to, “Don’t fight the (Japanese) Fed” and look for selling opportunities inline with major technical resistance and their government’s intentions.
We stretched this chart of the Australian Dollar out over a longer timeline in order to show nearly the complete decline over the course of the last couple of years since making the all-time high around $1.10 to the U.S. Dollar. The long-term nature of this chart also provides a good example of the commercial trader category’s typical behavior, both good and bad. Finally, we’ll tie this back in at the end as we are nearing a critical juncture in the Australian Dollar and, commodities in general.
The Euro currency was in free fall for nearly a year as the world thought it was heading to parity with the U.S. Dollar. The further it fell, the more they talked about it. Parity appeared to be right around the corner. However, the market’s internals began to re-balance themselves as the commercial traders stepped up to defend even money to the tune of a new net long record position being set as the Euro currency traded down to $1.05 vs. the U.S. Dollar. This is when things got interesting.