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FX markets still appear to be wondering what the overall theme is going to be for the current quarter and the price action so far on EUR/USD illustrates this fairly well. The range on EUR/USD over the past three weeks has been the narrowest for 6 ½ months which illustrates the underlying struggle as sellers emerge above 1.30 and despite the breach early on, the 200d moving average (currently 1.2823) provides decent support (as was the case on Wednesday).

Elsewhere, the Aussie has also failed to break out of the 1.0180 to 1.0625 range that has held for most of the past three months, with the latest jobs data overnight providing some support. So, whether it’s a fresh round of the European crisis (note Spanish downgrade overnight), a dollar-wobble on the US fiscal situation or renewed concerns on China, there remains a sense that the market is waiting to see what the next big thing will be.


The golden struggle. Gold is still waiting for its breakaway move and from the look of the charts, that’s appears some way off. Last week saw a failed attempt to push above the $1,800 level, the same as was seen back in late Feb/early March, with the move back in November of last year seeing gold quickly sold on the breach above.   Why the reluctance? Well, partly because of the failed attempts in the past, investors are perhaps concerned whether there is enough underlying momentum to push gold to new highs on a sustained basis. The dollar itself is now some 0.7% higher vs. the levels trading just ahead of last month’s Fed meeting, so the dollar debasement story so far is looking a little weak. As we’ve mentioned before, the same holds true for inflation. In the developed world, inflation is only really an issue for the UK – less so in Canada. But it’s not running away in the fashion that many have feared.   So what’s it going to take to make new highs on gold? Probably a modest dollar wobble but more likely, as the deadline for the fiscal cliff looms larger and the markets become a little more concerned as to the consequences. The 1mth inverse correlation between the dollar and gold is at -.67 vs. an average of -0.54 for the year to date so, unless this changes dramatically, then it’s in the dollar where gold’s fate lies for the remainder of the year.

Making sense of the dollar.   Defiantly ignoring the negative prognostications of the vast majority of currency strategists and commentators, the dollar has recorded a modest appreciation of 1.5% since the Fed announced unbounded QE four weeks ago. Numerous explanations help to account for the surprise rise in the greenback – the economy has been stronger than expected, the jobs environment looks perkier as many major American retailers announce plans to hire thousands of temporary workers, Europe and Asia still look vulnerable and risk appetite has been somewhat defensive. Also, a number of major American companies have been repatriating ahead of fiscal year-end and traders are very short dollars, expecting the greenback to struggle as the year-end fiscal cliff approaches. The dollar index achieved a four-week high yesterday and now looks poised to test resistance up around 80.80 in the short term. Right now, it probably pays not to underestimate the buck.