Chart of the day: XAUEUR on a record high
It’s a fantastic day for gold bulls.
Gold has jumped to close at $1601 dollars per ounce, the highest closing price since March 2013, with gold priced in multiple currencies (NZD, ZAR, AUD, BRL, etc) at all-time highs.
Despite the coronavirus outbreak and fear of the potential economic fallout, there is a theory that investors are maintaining their core exposure to equity while hedging their risk using gold and US Treasuries.
However, despite the gold appeal, trading in USD (XAUUSD) might not be the most compelling opportunity here. Gold was moving sideways against US dollars recently in part because the US dollar was also in a bullish trend over the same period. The dollar index (USDX) is now honing into 99 after a strong run of higher highs and higher lows since early February due to better relative US economic data. The chart below shows that gold and the US dollar were moving in the same direction this past few weeks.
Why is gold priced in EUR?
The question then becomes what’s the best currency to trade gold for a potentially better outcome? Think about the euro (XAUEUR), which extended its decline to a multi-year low of 1.0785 on Tuesday, its 12th loss in the last 13 trading days.
The downbeat economic data is clearly weighing on the EUR. We see the worse-than-forecast industrial production, consistent below-50 PMI figures, lowest GDP growth (4Q19) in six years, and the latest far-below-expectation ZEW indicator. The market now shifts the focus to the PMI report from Germany and the Eurozone due on Thursday.
Apart from the weak economic prospect, the key driver of the EUR remains the popularity of the carry trade, and the use of the EUR as a primary funding vehicle. It’s no surprise the EUR remains under pressure in the carry, where traders short the low-yield currencies (like EUR) and long the higher-yield ones (like dollar or EM currencies).
As long as we see subdued implied volatility, tight credit spreads and dip-buying on equities, carry trade will continue, which is overshadowing the EUR. For gold traders, you always want to trade an appreciating asset against the weakest currency. That’s why we see the gold priced in EUR hit the record high of 1485.
Will the trend continue?
For now, the US market is the ideal place to park money and gold is acting as a hedge against economic fragility. Other than profit-taking there are no obvious reasons for a lasting reversal, especially with the market expecting poor data to come from China and its Asian trading partners (due later this month) showing the severe impact of the coronavirus outbreak. Whether this data becomes a catalyst for a reversal of the equity market and high volatility remains to be seen.
If the realised and the expected economic condition could harm the employment and inflation objective, the Fed might come out and reconsider a future adjustment.
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