Why Forex Traders Should Care About Gold Collapse

• Why Forex Traders Should Care About Gold Collapse
• EUR - Weaker ZEW Could Accelerate Losses
• GBP - Potential Upside Surprise in CPI 
• Will the RBA Minutes Save the AUD?
• NZD - Day's Biggest Percentage Loser
• CAD - Hits 3 Week Lows
• USD/JPY - Losses Extend on Risk Aversion

Why Forex Traders Should Care About Gold Collapse

There were some big moves in the foreign exchange market today but nothing compares to the sell-off in gold. In fact describing the move in gold, as a sell-off is an understatement because the 8% decline is the largest single day loss for the commodity in 3 decades.  While gold is also considered a form of currency, it is a truly global commodity that is affected by broader and less country specific factors than traditional fiat currencies backed by individual governments. Therefore big moves in gold can be an important signal for currency traders.  On a daily basis, gold may take its cue from the market's demand for dollars, but this time around, the sell-off in gold is sending a very strong message about investor appetite. 

For the past few years, buying Gold as an inflation hedge was one of the most popular trades championed by some of the most respected investors around the world.  Unfortunately as time progressed, patience began to wear thin and investors were seeing their investment values dwindle with no hope of rapidly rising inflationary pressures in sight.  Consumer and produce price reports also failed to show any major uptick in price pressures as weak demand prevented businesses from raising prices. Tomorrow's U.S. consumer price report should show how benign inflation pressures have been in the U.S. as CPI is expected to be have stagnated in the month of March.  U.K. and Eurozone consumer price reports are also scheduled for release and while price pressures have been stronger in both countries, there is still more downside than upside risks.  As a result, with returns in equities becoming more attractive, a larger subset of investors are giving up on their losing inflation hedge and going on the hunt for yield. 

The sell-off in gold also reflects concerns about global growth. Between this morning's softer U.S. economic reports, last night's weaker Chinese data and this month's disappointing U.S. retail sales and jobs numbers, there are definite signs that the global recovery is losing momentum.  The U.S. dollar traded higher against all of the major currencies today except for the Japanese Yen on the back of weaker manufacturing activity in the NY region (the Empire State manufacturing index dropped to 3.05 from 9.24) and decline in foreign purchases of U.S. Treasuries.  Finally,  $1,500 was a key support level in gold and when that broke, the sell-off gained momentum quickly. Stops were triggered, margin calls were made and many investors opted to abandon their losing positions then to add margin.

For Forex traders, there's a few important takeaways from the move in gold 1) there's no need to worry about inflation until there are significant and sustainable signs of growth 2) be worried about the slowdown in China and the U.S. 3) beware of how quickly losses can occur when key levels and stops are taken out.  In terms price action, these concerns could lead to further pressure on major currencies.

EUR - Weaker ZEW Could Accelerate Losses

Compared to other major currencies, the euro has been surprisingly resilient. The NZD/USD is down 2% today and yet the EUR/USD is down only 0.5%. A large part of this has to do with better than expected Eurozone data.  The region's trade surplus rose from 8.7B to 12.0B in the month of February thanks to an increase in exports and decline in imports.  Nonetheless, the euro is still under pressure and until resistance at 1.3150 is broken, the currency is vulnerable to additional losses. The German ZEW survey, a measure of investor confidence is scheduled for release tomorrow and a disappointment could accelerate losses in EUR/USD.  Economists are looking for a sharp pullback in confidence and we believe that this is likely considering that Cyprus and Italy posed a risk for the Eurozone in the month of March.  German data was also very mixed as the cracks in the Eurozone's largest economy begins to show.  The ZEW survey may be the most important economic report expected from the Eurozone this week but European politics is also in focus. Italian lawmakers begin the process of electing a new President this week. How the discussions go will be reflection of the current government's ability to work together.  There is still no timetable for selecting a Prime Minister but choosing a President will be an important next step. 

GBP - Potential Upside Surprise in CPI 

The British pound also fell victim to risk aversion but its losses were the most limited of the major currencies.   Part of the reason could be the expectations for stronger U.K. consumer prices.  This is a very busy week for U.K. data and based on the outcome of these reports, the GBP/USD will either extend its losses or finally break above 1.54.  Last night's 2.1% rise in the Rightmove House price index was encouraging but not enough to get sterling traders over excited. Tomorrow's consumer price index is one of the most closely watched pieces of economic data for the Bank of England.  If you recall, when the BoE minutes were last released, we learned that the central bank overlooked slower growth because of their concerns about inflation.  Economists are looking for CPI growth to slow but based on an increase in shop prices reported by the British Retail Consortium, there is room for an upside surprise that could drive the GBP higher. 

Will the RBA Minutes Save the AUD?

The worst performing currencies today were the New Zealand and Australian dollars but the Canadian dollar was also fell sharply.  The combination of lower gold prices and weaker Chinese data washed out the longs.  Having broken through a series of support levels, the only hope now for AUD and NZD is tonight's Reserve Bank of Australia meeting minutes.  Data since the last meeting was mixed so the RBA's view may not have changed by much.  When they last met, Governor Stevens maintained a glass half full view of the economy and if he holds onto this stance, it could lend support to the AUD and NZD. If there are any signs of renewed concern however, we could see steeper losses in both currencies.  The problem is that China is beginning to feel the pains of overexpansion as slower growth in fixed capital investment, industrial production and retail sales starts to weigh on GDP.  China's economy expanded at an annualized rate of 7.7% in the first quarter, down from 7.9% in Q4. Considering that most economists were looking for faster growth, this pullback caught everyone by surprise.  Despite strong credit growth, a higher luxury tax, a smaller increase in disposable income, decline in government spending and softer inflation caused consumer spending growth to slow in the first 3 months of the year.  The question now is whether the weakness in Chinese data will prompt the People's Bank of China to consider shifting from neutral to easier monetary policy. We believe that the central bank will want to see if the slowdown is sustained in the second quarter before they change interest rates or the reserve requirement ratio so AUD and NZD traders shouldn't expect any help from the PBoC.

USD/JPY - Losses Extend on Risk Aversion

USD/JPY extended its losses as risk aversion hits the currency. Today's sell-off in U.S. stocks and last night's softer Chinese economic reports may have contributed to a general sense anxiety and nervousness in the markets.   Short Yen traders also reacted negatively to a report from the U.S. Treasury that was released late Friday.  In their semi-annual report on currencies," the Treasury said "We will continue to press Japan to adhere to the commitments agreed in the G-7 and G-20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes."  Some investors interpreted this to mean that the U.S. will criticize Japan's policies but with the weaker Yen being a byproduct of monetary policy and not currency intervention, it may be difficult for the U.S. to justify doing so when they are also guilty of competitively devaluing their currencies through monetary policy.  Meanwhile economic data from Japan has been good with industrial production revised higher in the month of February. We continue to expect the weaker currency and monetary policy to support Japan's economy.