Demand for Higher Risk Commodities Drives Gold Higher

James Hyerczyk from ForexHound.com at 02/02/10

April Gold surged for the third consecutive day fueled by a combination of oversold conditions and a weaker Dollar. After failing to attract fresh selling pressure following the break under the December bottom at $1076.50, this market has formed a support base. Tuesday’s rally helped form a new main bottom at $1073.20. Based on the short-term range of $1166.70 to $1074.40, traders should look for a retracement to $1120.50 to $1131.40. Watch for a technical bounce following a test of this zone.

U.S. equity markets failed to attract selling pressure early in the session, triggering a buying spree. Increased demand for higher risk assets helped lead the charge along with good earnings reports and a better than expected U.S. Pending Home Sales Report. .

The March E-mini S&P 500 held an early test of a 50% price at 1084.50.  The failure to break this market when it tested 1082.00 led to an initial short-covering rally which encouraged fresh buying throughout the day session.  The charts indicate a rally to 1109.25 is likely over the near-term.

March Treasury Bonds finished higher in light trading. Bigger players seem to be standing aside this week ahead of Friday’s monthly Non-Farm Payrolls Report. Greater demand for risk could lead to renewed pressure on Treasury futures if reports continue to support the recovery in the economy. Fear had been driving investors into the safety of the March Treasury Bonds and March Treasury Notes, but global economic conditions have calmed enough to drive demand down. The bigger picture still indicates that March Bonds are finding resistance inside a major retracement zone at 118’24 to 119’24. A close under 118’24 will indicate weakness that could trigger the start of a break back to 116’06.

Demand for higher yielding assets and a weaker Dollar helped to support March Crude Oil. Monday’s upbeat U.S. manufacturing report and oversold conditions helped ignite the start of the current rally. A new main range at 84.45 to 72.43 has been formed which could trigger a retracement to 78.44.  Tomorrow’s oil inventory report will set the tone for the day. Traders will be looking to see if a pick-up in U.S. manufacturing has led to increased demand for petroleum products.

The U.S. Dollar finished lower, pressured by increased appetite for risky assets, despite a call from Treasury Secretary Geithner for a stronger currency. Trading remained subdued today ahead of central bank meetings on February 4th and the U.S. Jobs Data Report on the 5th.

Technical factors helped draw selling pressure to the Dollar. At the start of the week, the Dollar Index, a trade weighted basket of currencies, was at overbought levels based on the Relative Strength Index and the Stochastics Oscillator. In addition, traders remain less skittish this week about seeking higher risk assets. Low volume also contributed to the loss in the Dollar. Noticeably absent was a major stopper in the market.

The Dollar was under pressure from the New York opening, following a weak overnight showing. A comment from Treasury Secretary Geithner regarding a tighter U.S. budget and a stronger Dollar did trigger a pause in the weakness about mid-session, but that move did not materialize into anything substantial. Higher demand for gold, crude oil and equities held the Dollar in check most of the day and pressured it into the close.

The March Australian Dollar took a huge hit early last night on the surprise announcement that the Reserve Bank of Australia was leaving interest rates unchanged at 3.75% after three consecutive hikes. There is no doubt that the moves by China to tighten its lending practices as well as reign in its stimulus package had an influence on the central bank’s decision.

The Aussie fought back to finish off its low, which led to speculation that the overnight break was more long liquidation rather than fresh selling. In my opinion, the move by the RBA was more of a surprise to economists rather than traders who have been pressuring the Aussie Dollar since China first began tightening. The lesson to traders caught long overnight is to watch the bond market for indications as to which way traders are leaning.

The March Euro finished higher after yesterday’s closing price reversal bottom formation. This pattern signals a correction in the downtrend is taking place. So far the charts do not indicate a change is trend is in the offing yet. Traders continued to cover recently established short positions as pressure from the financial crisis in Greece seemed to be fading.

On Thursday, the European Central Bank is expected to announce that interest rates will remain steady. In addition, investors expect to hear more upbeat news on Wednesday when the European Union releases its official opinion on Greece’s efforts to shore up its budget. Early talk is that Greece plans on making drastic changes to slash its budget deficit. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level.

The March British Pound reversed earlier weakness to finish slightly higher. Low volume was the highlight today amid speculation that traders have turned less negative towards the economy despite a poor housing market, growing fiscal deficit and uncertainty regarding the upcoming U.K. election. On February 4th, the Bank of England is expected to announce that interest rates will remain near zero. Traders are still trying to decide whether the BoE will increase or extend its quantitative easing program. Last quarter’s poor GDP number may force its hand.

The March Japanese Yen traded stronger today despite increased demand for higher yielding assets. The word is that speculators pushed around a thinly trading session on the presumption that the central bank is less likely to intervene to weaken a strong Yen. The news from Australia may increase demand for lower yielding assets, but the rise in the U.S. stock market is saying something else.

The rally in the Euro continued to take the pressure off the Swiss National Bank to intervene.  This encouraged traders to buy the March Swiss Franc which had fallen sharply the past week. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Look for renewed pressure on the Swiss Franc if the Euro turns weak once again. Watch for volatility on Wednesday following the release of the EU’s opinion on the Greece budget solution. Based on current conditions, this pair may rally back to .9645 before finding resistance.

Firmer equities, gold, and crude oil helped support the March Canadian Dollar. Monday’s closing price reversal bottom was confirmed overnight and a new main bottom was formed at .9326. The chart indicates that a minimum 2 to 3 day retracement is likely with an upside target of .9553.