Euro Rally at Risk Ahead of German GDP Data:8/8/2010

The Euro hit fresh multi-month highs against the US Dollar amidst generally positive economic developments out of the single currency bloc and fairly disappointing economic data out of the US economy. Traders sent the USD lower against every single G10 counterpart through Friday’s close, and momentum plainly favors further declines. Given comparatively strong fundamental developments out of the Euro Zone, it is relatively little surprise to see that the Euro was quite nearly the top-performer through Friday’s close. Yet the coming week of European economic data could very well set the tone for short to medium-term trading.

Markets anxiously await the results of several key Euro Zone economic data releases in the week ahead—most notably German and broader Euro Zone Gross Domestic Product growth figures for the second quarter. Bullish trends in business survey figures and other key data points lead economists to predict that Germany saw its strongest growth since Q1, 2008 in the second quarter. Such relatively lofty expectations leave ample room for disappointment, however, and it will be critical to see whether reality can match forecasts. Analysts likewise believe that Germany—Europe’s largest economy—will continue to drive broader Euro Zone growth. It suffices to say that any disappointments out of said release could have broader implications for general market sentiment for regional fundamentals.

Traders have recently seemed all-too-willing to punish the US Dollar for lackluster economic data as of late, and one has to wonder whether similar disappointments out of the Euro Zone would have the same effect on the Euro currency. Certainly the past two months of gains leaves short-term momentum plainly in favor of EURUSD gains. Yet the currency pair is approaching what may potentially prove a significant resistance mark at $1.3500—the 50% Fibonacci retracement of the December, 2009 – June 2010 decline and the pair’s 200-day Simple Moving Average. On the US Dollar side, the widely-followed Dollar Index is currently at risk of breaking below a long-standing trend channel and its own 200-day moving average.

The coming week may prove critical in determining broader EURUSD trends if we see a test of the key 1.3500 handle. Euro bulls may look to protect profits on a potential failure at said level—especially as oscillators have reached heavily overbought levels on daily charts. - DR

Gold’s Best Run in Nine Months...Conviction of $1,250:8/8/2010

Gold ended the week with another strong advance. Closing Friday well in positive territory, the precious metal in fact recorded its most consistent bull trend (eight consecutive daily gains) in nine months. If this was the only analysis that was used to assess the strength of the commodity, we would be led to believe that gold was perhaps entering a new phase of a larger market cycle. However, when we take a more critical look at the speculative and fundamental elements of this performance, there is reason to believe that the market’s gains are far more strained than a mere series of daily closes would allow for. And, one of the most accessible arguments against a boundless rally is the pace of gold’s climb to this point. Despite the consistency of the seven-day advance, the metal has only progressed 3.8 percent and has made modest progress in reversing the previous month’s tumble. For comparison, the equivalent run in November scaled 8 percent and developed near the end of a long-term bull wave.

From a fundamental perspective, gold’s hesitation in further is logical. Through the commodities steady climb, we have seen the backdrop of risk appetite fluctuate from positive to negative a number of times. A simplistic association of this commodity playing the role of a safe haven would lead us to believe that this is a break in a critical correlation. This is a mistaken conclusion for two reasons. The first point to make is that gold is not the perfect alternative to a risky asset. It is uncertainty in the stability of the financial markets in general that imbues the precious metal with an abnormal value that directs capital to the already expensive asset. The high volatility of exchange rates and the risk of liquidity troubles for normal investment assets highlights the metal’s unique position in the market. That being said, gold is not nearly liquid enough to stand in as its own currency; it is not acceptable payment for most other assets (you can’t easily buy stocks with gold for example), it is exposed to high volatility along and it is heavily influenced by speculators and buy only funds.

The other consideration for gold’s deviation is that risk appetite trends themselves are ill-supported. Though we have seen equities climb this past week to new two-and-a-half month highs, the advance has been choppy and the test of new levels has depressed rather than amplified momentum. If we look at the market in context, most growth-dependent assets are attempting to retrace losses suffered earlier in the year and are therefore currently drifting within a broader range. This leaves the capital market more or less range bound rather than carving a distinct trend. Considering additional purchasing for gold will come more and more from long-term sources, the draw of a meaningful trend is imperative at such heights.

Looking ahead to next week, we have to consider both the catalyst for underlying risk trends rather than short-term economic and speculative implications of event risk. Looking at this week’s economic offerings, there are more than a few indicators that can supply short-term activity; but the underlying current will be significantly altered by few releases. From the mix, the European GDP numbers are perhaps the most influential figures. Not only is this a reading of expansion, it will define Europe’s ability to survive austerity. - JK