The Green And The Gold And The Fed

Let’s start with the U.S. dollar today. It fell against major currencies and helped put a tiger in the tank of precious metals trading. It pushed the entire complex up by a third of a percentage point all on its own.

The occasion for the dollar’s fall was the release of the 12-region Federal Reserve “Beige Book,” one of the most far-ranging assessments of the U.S. economy within one binding. It is not a plug-ugly set of data points, but it won’t win any beauty contests either. The general outlook is described this way:

"Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from mid-February through the end of March. Activity in the Richmond, Chicago, Minneapolis, Dallas, and San Francisco Districts grew at a moderate pace, while New York, Philadelphia, and St. Louis cited modest growth. Boston reported that business activity continues to expand, while Cleveland cited a slight pace of growth. Atlanta and Kansas City described economic conditions as steady."

Some other touchstones of the report can be encapsulated as follows:

Demand for manufactured goods was mixed. The New York region saw an unexpected contraction in manufacturing. A strong dollar, falling oil and harsh winter weather were important factors. Oil and gas investments have declined.

The labor market remained stable or verged on modest improvement – there was apparently significant difficulty finding skilled workers. Most districts noted modest upward pressure on wages and overall prices. There was sluggishness in housing due to harsh winter weather in the northern two-thirds of the country.

This all could mean that the Fed may be more inclined to put off even discussing seriously a rate hike in the FOMC June meeting.

That – coupled with sluggishness worldwide – helped drive the dollar down. But, we have to ask ourselves if the dollar can really be kept down. Our response is “No, it can’t, unless something extraordinary happens.”

The European Central Bank decided to stand pat on its rates, keeping alive the rate spread between the EU and the U.S. While the yen is behaving quite robustly, its underpinnings are shaky, given the state of the Japanese economy. China has also slowed tremendously and will, in our forecast, continue to struggle. Last year we talked about the glass ceiling that most “second world” economies face as they try to modernize. (Russia is a good example.)

The dynamic at work in the currency markets shows that traders are buying hard into any dollar dip, convinced the Fed will soon be raising rates. "The data hasn't been weak enough for long enough for expectations that a Fed hike is in the cards to change, so any dollar weakness is being bought into," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

Crude oil hit its high for the year, bolstering the equities markets, which were up across the board in the U.S. and Europe, though mostly down in Asia. Higher oil prices will increase inflation and thus the likelihood the Fed will raise rates. Although if oil rises too high, U.S. production will kick in again and squash prices back down. That would happen around $60 to $65 per barrel.

Except for trading retracements and selling when price butts up against resistance, gold doesn’t have much of a fundamental trend at the moment, so we have to keep a very careful eye on technical indicators.

Wishing you as always, good trading,