Currencies & Metals Overview

Please note that all of the charts are updated as of the last Fridays weekly close. The volatility we are experiencing in recent days has been incredible, especially in Precious Metals, so not all charts are updated with Mondays close.

Chart 1: Trade Weighted Dollar Index has approached a major resistance 

Trade Weighted Dollar vs 200 MA 

Source: Short Side of Long

A quick update in the currency and metals space, with a few interesting charts for you guys. US Dollar Index, as well as the Trade Weighted Dollar seen in chart above, have both reached major resistance zones. This has occurred on extremely positive sentiment and very high net long COT positioning. In other words, every man and his dog is expecting higher US Dollar in coming weeks and months. Therefore, from a contrarian perspective, the greenback could now pullback and correct. This could give breathing space for many foreign currencies and commodities, many of which are extremely oversold right now.

Chart 2: European Euro is at the support of a large consolidation triangle

European Euro Performance 

Source: Short Side of Long

One of these assets is the oversold European Euro, which has had a terrible performance over the last quarter or so. As a matter of fact, the currency has been struggling since 2008, when it printed a record high and it has remind virtually trend less. Every time the Dollar rallied, the Euro has had its share of recoveries so on the longer term weekly price pattern, we now have a series of lower highs and higher lows, setting up an interesting consolidation triangle.

The Euro currently sits at the bottom of this mega technical pattern, which tends to be a buying signal or a support for some traders. At the same time, investor sentiment is very negative while positioning has approached one of the highest net short builds in history. Any positive news could create some confidence and might result in a fast short squeeze at this point.

Chart 3: Emerging Market Currency Index is testing March 2009 lows… 

Emerging Market Currencies 

Source: Short Side of Long

Majors like the Euro aren’t the only currencies being sold down in favour of the US Dollar. Emerging Market currencies have been under strong selling pressure in recent months, clearly seen in Chart 3. The equal weighted index of 14 currencies within global Emerging Markets; ranging from Latin America to Eastern Europe, and from Africa and Asia; has now declined to test an important support level dating back to the Global Financial Crisis of March 2009. A rebound in the index from current levels would stabilise the whole region at least for awhile and create a bit more of a risk on environment. it could also be quite supportive for Emerging Market equities,discussed on the weekend.

Chart 4: PMs volatility is insane with bears squeezed by major reversals

Precious Metals 

Source: Bar Chart

Finally we turn our attention to Precious Metals, which correlate very closely to currencies. In an article titled “Gold Remains In A Downtrend”  posted only a couple of days ago, I concluded that:

Now, the only way for Gold to change the current bearish outlook is to stage a strong rally back $1,200 level first and then $1,250 straight afterwards ($115 and $120 in GLD respectively). This would reverse the recent break down and post a meaningful higher high price pattern. I will be watching closely at Gold’s movements in conning days and weeks.

Well, would you believe that only a day after I wrote that, Gold went on to prove itself and move up above $1,200 per ounce as quickly as it physically possible. We now have a classic double bottom in place, most likely signalling more buying to come. If the price can overcome a resistance at $1,250 per ounce, Gold would set itself up for a higher high. After that, we have the resistance of the 200 day moving average around $1,285.

Adding evidence to the bullish case, is the magnitude of how oversold Silver became. During yesterdays Asian trading hours, Silver was being dumped so quickly that it reached 80 on the ratio between it and Gold in matter of hours. This level isn’t a magic by any means, but has usually been some kind of a historic floor and good buying spot. We have seen major bottoms at this ratio level in 1986, 2001, 2008 and maybe even currently (in early 1990s ratio widen even more).

Chart 5: Gold Silver ratio has approached a major historical floor of 80

Gold Silver Ratio 

Source: Short Side of Long

As already mentioned in previous posts, one of my Silver buy entries was at $14.60 support level dating back to 2010 (click here to read the mention and disclosure). It got triggered yesterday during Asian trading hours, but the downside volatility was so high, I thought it might be a mistake to buy there and then. I couldn’t sit around and watch as Silver was in a free fall, so I walked away from the computer. Let me be quite clear here: in other words, I was shitting my own pants!