Charted Territories

By Jim Donnelly, Olson Global Markets

After months of better-than-expected housing data, along with slow but continued improvement in the employment numbers, the U.S. Dollar Index (DXY) held its ground in recent months then resumed its upward path in recent weeks. Overt intentions by the new Japanese government to stimulate its sluggish economy by devaluing Yen (by adopting an aggressive quantitative monetary policy including the purchases of both European and U.S. Sovereign debt issues) clearly sent Yen sharply lower during the past quarter versus both Euro and the greenback. Nevertheless, it might have been last week’s release of the Federal Reserve minutes from its last meeting which suggested a possible reduction in open-market bond purchases that triggered the dollar’s latest move higher.

From a technical point-of-view, the DXY is again in position to move toward an eventual test of key trend line resistance currently sitting at the 86.20 level. That being said, a move of that magnitude would likely carry with it a hint of disinflation of imported goods, but inflation on exported goods. That, in turn, could become a drag on U.S. exports at the margin. Such a condition would liken dampen expectations for improved earnings growth as well as diminish expectations for higher equity prices in general.

In any event, with the Italian elections concluding on Monday, and with the prospect for sequestration to be triggered on Friday, another boost in the dollar’s strength could result over the short-run.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

With gold and silver futures falling since the beginning of October 2012, the Philadelphia Gold & Silver Index (a composite of sixteen precious metals mining companies represented by the symbol “XAU”) has too. Admittedly, spot gold futures and XAU have not traded proportionally or in “synch” with each other since 2010, but over time their respective trends have been somewhat related. Although the XAU peaked in December 2010, the price of spot gold futures continued its upward march until September 2011. Exploration costs combined with dwindling mining reserves have been cited as reasons that can send mining companies lower despite a rise in the precious metal itself.

This time around, however, spot futures as well as key gold ETFs like GLD have come under selling pressure with investors instead turning to the equity markets for better returns. This psychology shift is interesting particularly since the new government in Japan has made it clear for its preference of a quantitative easing policy geared at producing an uptick in domestic CPI to around the 2% area.

Across the “pond”, new reports reflecting economic contraction in Europe have thwarted the upward path of the Euro in recent weeks, if only temporarily. A pullback in the Euro along with a sharp drop in Yen over the past few months has helped the U.S. dollar index (DXY) to move higher. In turn, dollar strength has added to the downward pressure on gold, gold ETFs and the XAU.

While almost in an oversold condition, XAU is quickly approaching a test of key support at the 140 level. Usually, the combination of near-oversold conditions and a test of key support would team up to present an attractive buying opportunity. That being said, a solid break below 140 might result in an unexpected extension to much lower levels. Such a drop could underscore the preference for equities or for, perhaps, liquidity itself.

http://www.ogmarkets.com/