FX traders should pay attention to gold, too

Gold rallied massively on Friday, going from near 3-week lows intraday to a close at a three-week high. This turned the tables on the recent behavior of gold relative to risk appetite and FX traders should take note.

Gold underwent a fairly weak period of late, as the strong USD weighed and as the commodity complex was very weak in general on the entire “risk off” trade across markets. Traders might have also been steering clear of gold on the idea that the US economy might just stay strong enough for the Fed to avoid any immediate further easing moves, as the Fed’s various iterations of QE have propelled much of the gain in gold prices in recent years. But Friday’s weak US employment report put an exclamation point on a recent series of weaker numbers out of the US and suggest more scope for Fed activism than previously imagined.

If the gold move extends from here, it is likely in further anticipation of a Fed move, possibly signaled in some way as early as the next FOMC meeting on June 20th. And if QE anticipation remains high, this could feed into a bit of consolidation for the torrid rally in the US dollar. The open question is whether risk appetite follows gold higher in anticipating further QE from the Fed. If not, the USD may only see a shallow consolidation, while if we see more fervent hopes that a QE signal will once again ease the strain in markets, the USD consolidation might be far sharper. So watch the gold/USD/risk barometers carefully in coming days. One element arguing for a more shallow consolidation in the USD rather than a steeper one is the significant ongoing uncertainty not only in the Euro Zone once again, but also across emerging markets and China in particular. The weaker EM flows relieve some of the pressure on the USD to depreciate against the other major currencies.