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FX Trading – Juxtaposing QE, looking at gold, and watching CAD struggle

QE Policy: A Juxtaposition …

Put the news about the European Central Bank choosing not to extend certain QE measures next to the Federal Reserve discussing new potential QE measures and you’ve got the big reason, right there in front of you, why the euro is gaining ground so quickly on the dollar. Markets simply perceive global policies that put the dollar last … its appeal even more pathetic than the tattered euro.

US Dollar Index Daily:

…it’s the yield differential…that is the tightest correlation it seems.

Below is a chart of the six-month benchmark yield spread between the US and Germany. We’ve shared this before. It continues to validate the idea that yield is the driver. As US short-term yields fall relative to Germany, the dollar index falls in lock-step it seems.
Dollar Index (red) vs. Six-month US-German Yield Spread (black) Daily:

If you blinked you missed it, unless Gold holds the key?

Risk appetite took a hit a few hours ago – major currencies were down sharply versus the US dollar, US long bonds jumped, crude oil fell and so did gold. In fact, gold tanked. But it only took an hour or two for risk to recover; except that gold still looks sluggish. It’s certainly well off its lows, but is today an indication that risk really does need a breather? We’ll watch to see how currencies respond to the yellow metal should a correction be in order. As we talked about last week, gold has firmly accepted its safe-haven role of late … and then some.

Gold Futures Daily: a 38.2% retracement of its recent uptrend would put gold at support in an area of heavy price congestion.

A Conflict in Perception Management

Canadian Finance Minister Jim Flaherty is on the wires today talking about the encouraging signs for Canada’s economy, specifically growth in private sector (mostly business) investment. The Bank of Canada governor Mark Carney is mostly onboard with those comments, too, as he talks of a return to pre-recession employment and output levels in Canada. But one important item he also discusses: the risk of a US economy wallowing in pity. Ok, that was our line … but he has clearly cited that the US economy poses a risk to Canada economy because of course the two are very connected. We think this item among anything else highlights the recent underperformance of the Canadian dollar relative to other major currencies, especially commodity dollars.