We are currently seeing extremely interesting developments in Gold, the Yen and the stock markets! First of all, there is the decoupling between the Dollar-Yen and the other Dollar currency pairs. We had identified this as a necessary condition for a significant correction in the equity markets. That has now happened. The stock markets have shown a significant correction.
Let`s watch at the Dollar-Yen chart at a 4-hour level. We can see that the market has moved back towards the points from which the Dollar-Yen rally began, in line with the sell-off in the stock indices. Also in line with Gold, which had reached the target area that we had examined within the Pepperstone trading center. For a short period of time, it even exceeded the $1.685 mark.
Gold as a hedge
From here, however, considerable profit taking has started for Gold. This has thrown the price back into the $ 1,630 range. All this leaves little room for interpretation: The markets are very nervous as they try to understand whether the effects of this virus will hit the real economy severely and continuously over time. This uncertainty is now being priced in.
The stock markets needed a breather after the sharp rises to historic highs that had marked the trend of recent months. This, in turn, needed an external trigger. This was because US economic data does not currently point to a recession in the US. The capital flows remain in search of returns (which fixed income securities no longer offer).
In addition, hedging transactions in the form of buying Gold in the absence of volatility in the stock markets made sense for two reasons. The first is closely related to the virus and its possible impact on the economy. Gold offered itself as a safe haven. The second is related to the fear of many investors who were not invested in the stock markets and therefore did not need to take short positions on indices or other hedges. So they took long positions in Gold.
The US Dollar
We have seen the US Dollar being bought on a large scale over the past week. Until on Friday profit taking began due to the release of the Purchasing Managers’ Index Service. For the first time since 2016 the index had fallen below the inflection point of 50. If the fears of recession come true, we will see what needs to be done. However, at the moment, we do not see any conditions under which the Dollar can be sold in the market on a significant scale. It is indeed plausible that the Dollar will be considered a safe haven and will continue to be bought if sentiment continues to be depressed by a possible pandemic.
We do not see any other major issues today. From a macroeconomic perspective, no major releases are planned.
We recommend caution when deciding to act in the market as nervousness is high and changes in direction can be hefty and rapid. However, liquidity is very good and spreads at Pepperstone, for example, are therefore very narrow. As always, there are risks of a further slide in prices, but despite yesterday’s sell-off, these can initially be regarded as limited.