Gold And The CNH Are Dancing In The Same Rhythm

The Macro Perspective

During the past few years there has been a good correlation between the Gold and CNH.

The Chinese Yuan has been a good proxy for US Dollar relative performance and risk on / risk off flows. As the Dollar strengthens, USDCNH naturally rises and vice versa. Gold, being an asset primarily denominated in USD, tends to follow short-term USD moves very well. A rising Dollar will cause Gold to see selling pressure, while a falling Dollar will support Gold. Furthermore, a rising Dollar often means rising US yields, and this is another reason for short-term weakness on precious metals. One of Gold’s most frequently criticised characteristics is that it offers no yield, and hence when interest rates rise there is a natural outflow from Gold into bonds and other fixed income products.

If we look at USDCNH vs XAUUSD, the inverse relationship is quite clear.

These two instruments are very closely knit and will be greatly affected by global geopolitical events. The US/China trade wars will drive the USD/CNH pair, as will the Trump administration’s internal and external policies. Furthermore, it’s always worth keeping an eye on economic data; leading indicators seem to have topped (Chinese manufacturing PMI in particular having contracted for two months in a row), and monetary & fiscal policies will be very important going forward.

Stelios Kontogoulas

The Basic Technical Analysis Perspective

The DXY has rallied off some key support in recent days. The 200dma and year long trend line both came into play at the end of last week and supported the recent triangle consolidation. At the same time, the divergent RSI that plagued the potential for the US Dollar to move higher has come back to neutral and reset. This may give the US Dollar free reign in breaking higher in the coming weeks ahead. In addition, the pullback in the US Dollar has been shallow to say the least.

Now compare this to the gold, which has had a significant bounce higher the last several months. Typically (as we have pointed out) the US Dollar and Gold have an inverse relationship. But as gold has been pushing higher, the US Dollar has not sold off too much. Now, gold looks like we may have seen a near term top above the $1320 level as the most recent rally has a very divergent RSI. In the event that gold pulls back further this could lead to a rally in the broad US Dollar index once again.

The Elliott Waves Theory Perspective

The USD has been weak lately, especially against the commodity currencies as Crude oil, stocks and even gold saw a nice move up since the start of this year. From my experience a lot of times when a market is extremely sharp and strong from the day one in January, it tends to slow down very quickly or even get reversed completely later within the same year.

Today, I want to look at GOLD in connection with USDCNH. As you know the USDCNH has been trading lower since November of 2018, but if you look closely you will notice that this is not a strong bearish trend but rather a sideways move; a slow and overlapping price action where bears are acting much weaker than bulls compared to the previous leg up from April of 2018. From an Elliott Wave perspective I see the current move down as a correction within uptrend; it’s complex one in seven swings that is already trying to find support at 6.70. A rise above the upper channel line will be a very bullish indicator pointing to much higher prices ahead, possibly even back above 7.0.

The question is what will gold do at the same time? Well, if we look at the correlation then we can clearly see that it is almost inverse. This means that the metal may find resistance if the USDCNH finds a low and starts moving higher from here.

In fact, the wave count on gold shows five waves up since December of 2018, so a pullback can be close and that should be in minimum three legs. Resistance for the metal is at $1330-$1335 area. If that proves to be the case then watch for Aussie weakness too, but maybe I will talk more about this one in our next article.