A sharply stronger yuan and rallying dollar are setting the pace for the return of risk-on markets this morning. Gold is down for a second day after a torrid rally last week saw it hit one-year highs. The yen, another safe haven asset, is also lower as risk appetite returns.
Oil futures are up modestly this morning, after an eye-popping gain of 12% on Friday. (That is not a typo.) News that big oil companies are abandoning exploration projects, and that 28 more oil rigs were taken out of service last week in the US helped crude prices, even as the first supertanker loaded with Iranian crude is set to leave for Europe. At 10am in New York, Nymex crude was trading up 19 cents at $29.63, and Brent was up 16 cents to $33.52.
China is in the financial news for a couple of different reasons this morning. The more important reason for the broader market is, the governor of the Chinese central bank came out in defense of the yuan, after this morning's yuan fix was set sharply higher than expected. This led to the biggest rally in the yuan since 2005, and the highest that the yuan has traded this year.
The second reason is one that applies directly to today's gold market. Chinese investors, after a week-long holiday, came back to much higher gold prices, and started banking profits. US markets are closed today, so China was pretty much the only game in town for gold this morning.
Stocks are also bouncing back today, led by banks and energy companies. Today's rally in Europe is setting up the market for the biggest two-day gain in four years. This morning's risk-on markets are seeing demand slip not just for gold, but also for the Japanese yen, which is a major safe haven asset in Asia. The weaker yen was good news for Japanese stocks, with the Nikkei up 7.2%. Markets in the US are closed for the Presidents Day holiday, but Wall St. futures are trading higher.
April gold lost $8.40 Friday, but still closed the week with a 7.1% gain. This is the best week for the yellow metal since December 2008, when it jumped 9.1% in a single week. it is also the fourth straight week of gains for gold futures. Friday, gold was up $217 an ounce from its December low, and up $150 since the Fed rate hike.
This morning, profit taking in gold crossed pre-programmed selling thresholds, to push prices down over $30 to test hard support at the $1,200 mark. It was just last Thursday that gold was able to break upward through that level, and go on to add $60 on top of that. Most analysts thought that a sudden rise of that magnitude was overdue for consolidation, the only question being how big.
Today proved that the fate of the markets, at least in the short term, are being dictated by the central banks. Today it was the Chinese central bank propping up the yuan. Wednesday will be the release of the minutes of the Federal Reserve's January meeting.
Today, we should see support around $1200, then $1194. First resistance will be at $1,209, then $1,219.
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