Gold, Treasuries and USD

Gold is comfortably holding above the $900 level as the unusual decoupling with the euro (and unusual coupling with USD) continues due to the metal's improved luster resulting from widespread global economic gloom and ultra low global interest rates. As the price of money (interest rates) is held down by central banks, the price of its competitor (gold) pushes higher on the lack of yield reward in monetary alternatives, excess printing by Fed, Bank of England (BoE) and European Central Bank (ECB) as well as the absence of financial market shocks, which have proven negative for risk appetite as well as gold. Our Friday outlook for $900 gold was especially highlighted by the notion that gold remained lower in yen terms than in terms of USD, GBP or EUR, thus, more likely to lure Japanese investors into lifting the metal towards the YEN 82,000, which is technical resistance. As this ensues, retail investors worldwide begin to chase the headline-grabbing trend (+$900) and drive the metal further up. While having breached well above its 200-day moving average against both the euro and the dollar, gold remains 11% lower than its 200-day MA in yen terms. Reports of gold shortages in popular gold shopping places such as Dubai have are also starting to provide the "real demand" element to the rise in spot price of gold.

U.S. dollar and Treasuries. The emergence in the direct correlation between the dollar and gold can be explained better by the rise in bond yields (fall in prices). The past week has witnessed a rise in bond yields that was accompanied by a not-so-smooth strengthening in the value of the dollar. Despite the dollar's leap to 23-year highs vs. GBP, the currency made more modest gains vs. the euro, while nearing 14-year lows against the yen. The U.S. currency's gains were sketchy at best, as the rise in bond yields emerged from supply concerns (excessive borrowing) rather than improved economic data. Yields on 10-year treasuries hit six-week highs as the Obama Administration is expected to step up the nation's borrowing to a new record high, taking the fiscal deficit to as high as $1.4 trillion or (9.5%-9.8% of GDP). This week, auctions of two-year notes, 10-year notes and 20-year TIPS will raise $78 billion. As the dollar is unable to respond fully to rising bond yield's resulting from supply worries, gold prices take over the mantle of safety.

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Wednesday's FOMC decision will no longer carry the usual suspense associated with the size of the rate cut after the FOMC clarified it will keep rates near zero for "some time." Instead, the quantity of bonds purchased will be the new focus as the Fed implements the Term Asset-Backed Securities Loan facility, which case Treasuries may stabilize, yields weaken and the dollar ease lower.

Today's 15:00 GMT release of U.S. Dec existing home sales is expected to show 2.0% decline to 4.4 million. Also at 15:00 is the Dec leading indicators index expected to show a 0.2% decrease after two straight declines.

Euro has a firm grip above the $1.29 figure after last week's successful stabilization at the $1.2760 low kept bears at bay despite the latest S&P downgrade of a Euro zone member. Tuesday's IFO survey will be mulled for its components as both the current conditions and expectations index will have to show declines in order for EUR/USD to fall markedly. EUR/USD is unlikely to repeat last week's wobbly tone especially ahead of the zero-bound FOMC. Trendline resistance remains firm at $1.3030, followed by the 50-day moving average of $1.3320. EUR/GBP's six-day rally is being reversed amid a partial pick-up in risk appetite. 0.9275 is seen as a temporary support that could be broken only in the event of accumulated buying in global equities. GBP/USD made its obligatory bounce from the latest 23-year low of $1.35, but gains are increasingly capped at $1.3980. The main drivers of any sterling rebound are seen as technical buying, overall USD selling on Fed credit easing and the resulting bounce in risk appetite. Subsequent gains could emerge towards $1.4070.

USD/JPY rallies along with the rest of yen pairs as European bourse and U.S. equity futures broaden in the green territory. The break above 89 is seen extending towards 89.50, but trend line resistance (from Jan 19 high) seen imposing at 90.10. Support climbs to 88.40, backed by 87.80.

Ashraf Laidi

Chief Market Strategist

CMC Markets

66 Prescot Street

London E1 8HG, UK

Direct +44 02 030 038 674

Mobile +44 07 917 208 527

a.laidi@cmcmarkets.com

About the Author

Ashraf Laidi is chief global strategist at City Index-FX Solutions and author of “Currency Trading & Intermarket Analysis.” His Intermarket Insight appears daily on AshrafLaidi.com.

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