Gold continues to fall even as dollar loses ground

Gold continued to decline in the early part of Wednesday’s Asian session even as the U.S. dollar traded lower against most of its major rivals.

On the Comex division of the New York Mercantile Exchange, gold futures for July delivery fell 0.18% to USD1,375.15 per troy ounce in Asian trading Wednesday after settling down 0.50% at USD1,377.15 a troy ounce in U.S. trading on Tuesday.

Gold futures were likely to test support USD1,323.00 a troy ounce, the low from April 16, and resistance at USD1,444.15, last Tuesday's high.

Although the Federal Reserve has been attempting to quash speculation its close to winding down or ending its USD85 billion per month bond-buying program, the dollar gained steam Tuesday ahead of Fed Chairman Ben Bernanke's Wednesday testimony before Congress.

Federal Reserve governors have suggested in public recently that the U.S. central bank may begin to scale back stimulus tools this summer, causing uncertainty in markets that made the dollar more attractive due to its safe-haven appeal, which came at gold's expense.

Elsewhere, it was reported that the University of Texas Investment Management Co., the endowment plan for the University of Texas and Texas A&M systems, has taken a $300 million paper loss because of tumbling gold prices.

Panic selling in the yellow metal has prompted the withdrawal of 600,000 pounds of gold from the SPDR Gold Shares, the largest ETF backed by physical. The SPDR Gold Shares was the second-largest ETF of any kind at the start of the year, but due to gold’s slide, the fund is now the fourth-largest ETF.

Meanwhile, Comex silver for July delivery rose 0.22% to USD22.505 per ounce while copper for July delivery rose 0.19% to USD3.344 per ounce

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The dollar fell against most of its peers in U.S. trading

The dollar fell against most of its peers in U.S. trading on Monday after Japan's Economy Minister warned further depreciation of the Japanese currency could hurt the economy.

Fading hopes that Federal Reserve Chairman Ben Bernanke will hint at when easing tools will scale back also weakened the greenback.

Stimulus measures, such as the Fed's monthly USD85 billion bond-buying program, weaken the greenback by flooding the economy full of liquidity to keep interest rates low and encourage investing and hiring.

In U.S. trading on Monday, EUR/USD was up 0.43% at 1.2890.

The dollar fell on Monday after Japanese Economy Minister Akira Amari said that further depreciation of the yen could harm Japan's economy.

The Bank of Japan has enacted massive monetary easing measures to steer the country away from deflationary decline and more towards growth, with the yen plunging to lows against the dollar not seen since 2008.

Amari's comments sparked demand for the yen that came at the dollar's expense and brought up the euro and other currencies with it in a quiet session with little in the way of economic indicators or other steering currents.

The dollar, meanwhile, saw some support in wake of Friday's consumer sentiment data.
The Thomson Reuters/University of Michigan's preliminary consumer sentiment index rose to 83.7 in May from 76.4 in April, blowing past expectations for a rise to 78.0.

The numbers came after Federal Reserve officials suggested last week that the U.S. central bank may begin to unwind stimulus programs this summer and possibly end such policies by year end.

Fed Chairman Ben Bernanke is due to appear in Congress on Wednesday, though Monday trading, hopes began to taper off that the country's top central banker will hint at a need to wind down stimulus programs.

The greenback, meanwhile, was down against the pound, with GBP/USD trading up 0.64% at 1.5265.

The dollar was down against the yen, with USD/JPY down 0.82% at 102.35, and down against the Swiss franc, with USD/CHF trading down 0.62% at 0.9664.

The dollar was down against its cousins in Canada, Australia and New Zealand, with USD/CAD down 0.43% at 1.0232, AUD/USD up 0.83% at 0.9817 and NZD/USD trading up 1.28% at 0.8172.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.53% at 83.89.

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European Stocks Decline From 2008 High; Commerzbank Sinks

European stocks declined from the highest level in almost five years as bank and airline shares retreated, overshadowing better-than-forecast retail sales data in the U.S.
Commerzbank AG sank 5.2 percent after Handelsblatt reported the lender will sell new shares this week. Standard Chartered Plc dropped to a four-month low as Carson Block, the short seller who runs Muddy Waters LLC, said he’s betting against the bank’s debt. Air France-KLM Group fell 4.6 percent. Lonmin Plc rallied 2.9 percent after the platinum producer returned to profit in the fiscal first half.

The Stoxx Europe 600 Index slipped 0.3 percent to 304.22 at 3:44 p.m. in London, snapping four days of gains. The gauge advanced 1.3 percent last week as companies from BT Group Plc to Hochtief AG posted better-than-expected earnings and European Central Bank President Mario Draghi said policy makers are ready to cut interest rates if needed. The measure has climbed 8.8 percent in 2013.
“We still expect the U.S. economy to hit a soft patch in the second quarter, but today’s numbers -- together with the recent labor-market news -- confirms that the underlying recovery is robust,” Witold Bahrke, who helps oversee $55 billion as senior strategist at PFA Pension A/S in Copenhagen, said in an e-mail. ‘The risk is that the U.S. economy turns out to be too strong, which could put the sweet spot of decent growth and loose financial conditions at risk.’’

Retail Sales

Retail sales in the U.S. unexpectedly advanced 0.1 percent in April following a 0.5 percent drop in March, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg called for a 0.3 percent decline.
A report on May 15 may show that the euro region is suffering the longest recession since the single currency’s creation. Gross domestic product in the 17-nation economy fell 0.1 percent in the first three months of 2013, a sixth straight quarterly decline, according to the median of 39 economists’ forecasts in a Bloomberg News survey. That would exceed the 15-month long contraction in 2008-2009.
In China, industrial output in April rose 9.3 percent from a year earlier and retail sales gained 12.8 percent, the National Bureau of Statistics said today. The gain in industrial output compared with the 9.4 percent median estimate in a Bloomberg News survey of 38 analysts and an 8.9 percent increase in March.

FTSE, DAX

National benchmark indexes fell in 11 of the 18 western European markets. France’s CAC 40 slid 0.3 percent, while the U.K.’s FTSE 100 and Germany’s DAX were little changed. The volume of shares changing hands in Stoxx 600 companies was 14 percent less than the 30-day average, according to data compiled by Bloomberg.
Commerzbank slid 5.2 percent to 9.89 euros. Germany’s second-largest bank will sell new shares a part of a 2.5 billion-euro ($3.3 billion) capital increase, Handelsblatt said, citing unidentified people in the finance industry.
Standard Chartered, the U.K. lender that earns most of its profit in Asia, slipped 2.1 percent to 1,549.5 pence as Block said he’s betting against the lender’s debt because of “deteriorating” loan quality.
“We think the market misunderstands the amount of risk that’s presently in the book,” Block said at a conference in Las Vegas on May 10. A $1 billion loan to Samin Tan, chairman of Bumi Plc, the coal company at the center of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans to Far East Energy Corp. were “red flags,” he said.

Standard Chartered

Julie Gibson, a spokeswoman for Standard Chartered in NewYork, declined to comment on May 10. Doris Fan, a Hong Kong-based spokeswoman at the lender, also declined to comment.
Air France led airlines lower, falling 4.6 percent to 7.26 euros. International Consolidated Airlines Group SA (IAG) lost 1.7 percent to 271.1 pence while Deutsche Lufthansa AG slid 2.8 percent to 15.65 euros.
France reported its second confirmed coronavirus-related infection yesterday and Saudi Arabia’s Ministry of Health said the pathogen has killed 15 people in the Middle Eastern country since September. The virus is related to the one that caused Severe Acute Respiratory Syndrome, or SARS, a decade ago.
Lonmin advanced 2.9 percent to 286.8 pence. The third-largest platinum producer returned to profit in its first half through March from a year earlier. The profit of 13.3 cents a share compared with a loss of 6.3 cents in the year-earlier period. The median estimate in a Bloomberg survey of five analysts was for a loss of 4 cents.
Vestas Wind Systems A/S (VWS) surged 11 percent to 66.20 kroner, its highest price since March 2012. Credit Suisse Group AG raised the world’s biggest wind-turbine maker to neutral from underperform, citing benefits from cost cuts.

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Dollar Tone Improves

It took the break of the JPY100 level to trigger a broad based US dollar rally on Friday. This rally lifted the dollar's technical tone and suggests additional gains are likely. However, the out-sized gains ahead of the weekend warn of the risk of a consolidative phase first.

After trying for nearly a month, the market finally pushed the dollar through the JPY100 level and the up move accelerated to almost JPY102 within 24 hours. The triangle or wedge pattern that has been convincingly broken projects into the JPY104-JPY105 area. Pullbacks toward JPY100.70 will likely be seen as a new buying opportunity.

There has been a significant backing up of US interest rates. The 10-year yield has risen near 30 bp since the start of the month, and is nearing the upper end of this year's range. The rise in US rates follows a decline from mid-March through late-April that had taken the 10-year yield from 2.08% to almost 1.60% We find that the dollar is often sensitive to interest rate differentials. The sharp backing of US rates has more than offset the sell-off in the Japan's 10-year government bond and this has lifted the Treasury premium over Japan to its widest level in a month.


On the other hand, we find the euro-dollar exchange rate often tracks the US-German 2-year interest rate differential. Even though the euro slipped to new four week lows before the weekend, the premium the US offered over Germany was near the lower end of the range that has confined it since early April. This disconnect also supports the case for a consolidative phase. During this period, a euro bounce into the $1.3030-60 area may offer a new selling opportunity. In the bigger picture, we look for the euro to retest the year's low near $1.2750 in the second half of Q2.

The Swiss franc appears to be selling off in sympathy with the Japanese yen, or perhaps in part driven by similar forces. Swiss 2- and 3-year interest rates remain negative, and in the quest for yield the franc is shunned. This leaves the euro to retest the year's high near CHF1.2570, which is also the highest it has been since the SNB imposed a cap on the franc (floor for the euro). A move above there will fan expectations for CHF1.30.

Sterling's breakdown through a 2-month uptrend on an intraday basis warns that the $1.56 area, which has been repeatedly tested with little satisfaction, marks a more significant top. At the same time, the fact that sterling closed above the trend line is consistent with our sense that a period of consolidation, at least in the early part of the new week, is likely. During this phase, sterling can recover toward $1.5420-50.

The weakest currency over the past week was not the Japanese yen, but the Australian dollar. It lost about 3% compared to the yen's 2.6% decline. The Australian dollar traded below $1.00 for the first time since last June. It too managed to finish barely above there before the weekend. The technical bounce we expected early in the new week to alleviate the over-extended technical condition could see the Aussie trade toward $1.0070-$1.0100. After the correction, we look for the Aussie to test the trend line drawn off the 2011 and 2012 lows. It comes in near $0.9800 now and $0.9850 by the end of the quarter.

The Canadian dollar, like nearly every other major and emerging market currency, was sold off hard at the end of last week. Like the UK, Canada also reported constructive data, and like sterling, the Canadian dollar found little succor from the news stream. The US dollar's rally against the Loonie ran out of steam near important technical levels in the CAD1.0150-70 area. A move above there warns of scope for another cent gain toward CAD1.0250, but we are more inclined to see downside consolidation back into the CAD1.0060-80 area.

Fitch's upgrade of Mexico's credit rating pushed the dollar below MXN12.00 for the first time since 2011, which itself was the first time since 2008. The 2001 dollar's low took the form of a double bottom and was carved out of many weeks around MXN11.45. That said, the dollar recovery in the second half of last week created bullish (dollar) divergences in some technical indicators. Not only was the break of MXN12.00 not sustained on a weekly basis, but the divergence warns that more backing and filling may be necessary before a sustained break materializes. This also is consistent with more talk of another rate cut following disappointing industrial production figures (-0.3% in March rather than -0.1% the consensus forecast) before the weekend.

Observations from the CME speculative currency positioning:

1. The gross short yen positions increased by 10.4k in the week ending May 7. This is consistent with ideas that the speculators were anticipating a breakout after the Golden Week holidays ended. Some cast conspiratorial allusions to the fact that the dollar broke above JPY100 prior to news that Japanese investors had bought (a relatively small amount) of foreign bonds in the past two weeks. Anticipation more than malfeasance is the more likely explanation.

2. Gross short Canadian dollar positions were culled by 13.4k contracts to a still high 77.7k. It was the third consecutive week of short cover covering after peaking just shy of 100k in late-April. During this short-covering the US dollar fell from near CAD1.03 to almost CAD1.00. The sell-off in the Canadian dollar after the CFTC reporting period suggests the short-covering may have stalled.

3. The long Australian dollar positions fell by almost 20k contracts, leaving a mere 6.6k still standing. This is the smallest gross long position since mid-2010. It had peaked in late March near 141k contracts. The Australian dollar's further sell-off into the weekend, widely publicized bearish comments by a high profile hedge fund manager, and poor (piling on?) press, warns that the net speculative position may have switched to the short side.

4. The net speculative euro position has hardly moved in recent weeks. The net position has been short between 30k and 34k contracts for four weeks. Over this time, the euro has largely been confined to a $1.30-$1.32 trading range.

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U.S stocks erases losses, gain on talk of Fed easing; Dow gains 0.14%

U.S. stocks erased earlier losses and ended Tuesday higher on hopes the Federal Reserve will announce on Wednesday it will make no changes to extraordinarily loose monetary policies, which push up stock prices as a side effect.

At the close of U.S. trading, the Dow Jones Industrial Average finished up 0.14%, the S&P 500 index rose 0.25%, while the Nasdaq Composite index rose 0.66%.

The Fed will conclude a two-day monetary policy meeting on Wednesday and hopes the U.S. central bank will keep interest rates near zero and make no changes to its stimulus measures, including a monthly USD85 billion bond-buying program, gave stocks room to erase earlier losses and finish April higher.

Better-than-expected housing and consumer confidence data boosted spirits as well.
The S&P/Case-Shiller U.S. home price index rose at 9.3% in February from a year earlier, above expectations for a 9.0% increase.

Separately, the Conference Board said its index of U.S. consumer confidence rose to 68.1 in April from 61.9 in March, far above expectations for a reading of 60.8.
Manufacturing data, however, capped gains.

The Chicago purchasing managers’ index dropped 49.0 from 52.4 in March, confounding expectations for a reading of 52.5.

Leading Dow Jones Industrial Average performers included IBM, up 1.70%, Microsoft, up 1.44%, and American Express, up 1.12%.

The Dow Jones Industrial Average's worst performers included Pfizer, down 4.50%, Merck, down 1.69%, and Procter & Gamble, down 1.21%.

European indices, meanwhile, finished largely lower.

After the close of European trade, the EURO STOXX 50 fell 0.20%, France's CAC 40 fell 0.31%, while Germany's DAX 30 finished up 0.51%. Meanwhile, in the U.K. the FTSE 100 finished down 0.43%.

On Wednesday, all eyes will focus on the Federal Reserve.

Elsewhere, the ADP nonfarm payrolls report on private-sector job creation as well as government data on crude oil stockpiles will hit the wire.

In addition, the Institute of Supply Management is release data on U.S. manufacturing activity.

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