• Gold could see a corrective rally next week as CNY sell-off has stalled. The Chinese currency, an anchor and a risk for global markets, looks oversold and ready for a minor upside move.   
  • The technical charts are also calling a temporary relief rally in gold prices.
  • The long-run outlook remains bearish, could turn bullish on currency wars.

The gold price has recovered 1.5 percent from the one-year low of $1,211, boosting the odds of a strong corrective rally, technical charts indicate.

At press time, the yellow metal is changing hands at $1,230/Oz. Indeed, the metal was looking oversold (and still looks oversold), having lost 11 percent in the last three months. Hence, the recovery witnessed today is not surprising.

That being said, it is the turnaround in CNY that has likely helped gold, other metals, and G-10 currencies show signs of life against the greenback. The Chinese Yuan (CNY) has been guiding the global FX for almost a month now, meaning the Japanese Yen, gold, industrial commodities, Asian currencies, and majors have tracked CNY lower.

The Chinese currency has lost nearly 6 percent in the last four weeks. During the same time frame, gold has dropped from $1,309 to $1,211. Meanwhile, Asian currencies like INR have hit record lows above $69.00 per USD and the Japanese Yen weakened past 113.00 per USD despite trade tensions.

Clearly, the Chinese Yuan has been at the center stage of the markets. As a result, gold and other assets are seen picking up a strong bid in the next week or two as the CNY (or CNH - offshore rate) is looking due for a correction.

Further, gold's technical charts are also flashing signs of a relief rally.

Daily chart

The relative strength index (RSI) and stochastic have charted a bullish divergence. So, the metal could challenge falling wedge hurdle (seen sloping downwards to $1,240) by Tuesday.

A stronger rally to $1,265 (July 9 high) could be on the cards if the metal crosses the wedge resistance with strength (falling wedge breakout).

That said, only a daily close above $1,265 and rising 5-day and 10-day moving average (MA) would signal a short-term bearish-to-bullish trend change.

While the odds are stacked in favor of a corrective rally, the long-term outlook remains bearish.

Weekly chart

To start with, the 5-week and 10-week MAs are trending south, indicating a bearish setup. The metal found acceptance below the key rising trendline last week and is closing below the 200-week MA of $1,234 today.

The 100-day MA has almost crossed the 200-day MA from above. So, long-term averages (50-day, 100-day, and 200-day) are located one below the other, meaning the path of least resistance is to the downside.

View

Gold is seen rising to $1,240 next week and could extend gains to $1,265 on a falling wedge breakout.

A daily close above the crucial resistance at $1,265 (July 9 high) would confirm a bear-to-bull trend change but reckon the resistance would hold as the long-term technical studies are biased towards the bears.

Bull Scenario

The metal may rise sharply above $1,265 if the US-China trade war turns into a full-blown currency war.

By devaluing CNY by 600 pips today, the People's Bank of China (PBOC) has sent a message to Trump that it is ready to go the distance if the Fed is coerced into abandoning policy tightening. Clearly, two of the biggest economies of the world are on the cusp of a full-fledged currency war.

It is worth noting that Sino-US currency war could also the likes of ECB to delay their tightening plans, else the Eurozone would end up importing deflation via stronger EUR.

All-in-all, currency war could bode well for the yellow metal.

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