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GYN Monitor 6
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April 27, 2008 With Chart 1 updated as of May1.
The GYN Trio: Gold, Yen, and T-2 years Note
Overview
Interest rates are one of the most important determinants of the exchange rates of major currencies with the US Dollar. Gold, Japanese Yen, and Swiss Franc are low interest rates currencies and as such they are the most sensitive to fluctuations of interest rates and the most prone to be used in carry trade programs by hedge funds and other financial institutions.
Recent events since Mid March
Since Mid March, a perception that the current shallow economic recession in the US will come to a soft landing this quarter together with inflationary pressures stemming from sharp increases in prices in the energy and food sectors, have caused a sudden peaking out and reversal of bond prices. The corresponding sharp jump in interest rates across the entire maturity spectrum of US treasuries has been the key event that provided support for a sharp rally of the US dollar and a simultaneous sharp reversal of Gold, Yen, and Swiss Franc exchange rates.. Thus far, the reversal of the Euro has been much milder, a fact consistent with a lesser widening of interest rates differentials between the US and the European Union.
The mid March period found the US Dollar massively undervalued and major currencies greatly over-valued in terms of Purchasing Power Parity (PPP) so that it could be anticipated that little room was left for further depreciation of the the US Dollar and, conversely, for further appreciation of major currencies including Gold (see see earlier reports:
At the same time, Treasuries had become grossly over-valued with negative real rates across the board except for, and only marginally so, the 30 years Bond.
Thus, currencies and US debt instruments both had become highly vulnerable to price reversals. The economic situation provided the impetus for a sudden sharp jump in Treasury yields and this, in turn, provided a very effective proximate trigger for a decline in the exchange rates of currencies. As expected, the increase in interest rates impacted most severely the low interest bearing currencies namely Gold, Yen, and Swiss Franc. Among the sharpest increases
in yield, the 2 years Treasury Note stood out as a champion (the yield increased from 1.6% to to the current 2.41%). This was one reason for including this Note as a member of the GYN Trio. Another reason, was that the 2-years Note is closely correlated with the Fed fund rate and is believed to presage interest rates actions by the Fed.
Until recently, interest rates had not been considered in our reports on Gold and other currencies because, under the financial conditions produced by the subprime debt crisis, any increase was expected to occur much later and be much more gradual.
GYN Monitor and Updates
In the weekly GYN monitor updates, Gold will be monitored in terms of price relative to its 26 and 40 weeks simple mavgs. The exchange rates of the Swiss Frank and Euro will not be covered routinely but when included they will be cosidered in terms of their percent above PPP.
Current situation
The rationale elaborated above for selecting the GYN Trio and using it as a framework forfuture evaluations of the near term outlook for Gold, is illustrated in the combination Chart presented below. For a broader context, component charts of the Euro and US Dollar (DX Index) are also included. In addition, for ease of visualization, the component chart of the US Dollar is shown both in its normal orientation as well as in its "flipped" upside down orientation.
From even the must cursory perusal of this chart, there is no mistaking the identical time and extent of the reversals involving the T-2 years Note, Gold, and Japanese Yen. The decline of the Swiss Franc was similar to that of the Yen while that of the Euro was much more limited. Conversely, the US Dollar rallied and the extent of the rally was similar to that of the Euro's decline. This is consistent with the fact that the Euro carries the largest weight in the Index (about 60%) .
The GYN Trio: Gold, Yen, and T-2 years Note
Overview
Interest rates are one of the most important determinants of the exchange rates of major currencies with the US Dollar. Gold, Japanese Yen, and Swiss Franc are low interest rates currencies and as such they are the most sensitive to fluctuations of interest rates and the most prone to be used in carry trade programs by hedge funds and other financial institutions.
Recent events since Mid March
Since Mid March, a perception that the current shallow economic recession in the US will come to a soft landing this quarter together with inflationary pressures stemming from sharp increases in prices in the energy and food sectors, have caused a sudden peaking out and reversal of bond prices. The corresponding sharp jump in interest rates across the entire maturity spectrum of US treasuries has been the key event that provided support for a sharp rally of the US dollar and a simultaneous sharp reversal of Gold, Yen, and Swiss Franc exchange rates.. Thus far, the reversal of the Euro has been much milder, a fact consistent with a lesser widening of interest rates differentials between the US and the European Union.
The mid March period found the US Dollar massively undervalued and major currencies greatly over-valued in terms of Purchasing Power Parity (PPP) so that it could be anticipated that little room was left for further depreciation of the the US Dollar and, conversely, for further appreciation of major currencies including Gold (see see earlier reports:
At the same time, Treasuries had become grossly over-valued with negative real rates across the board except for, and only marginally so, the 30 years Bond.
Thus, currencies and US debt instruments both had become highly vulnerable to price reversals. The economic situation provided the impetus for a sudden sharp jump in Treasury yields and this, in turn, provided a very effective proximate trigger for a decline in the exchange rates of currencies. As expected, the increase in interest rates impacted most severely the low interest bearing currencies namely Gold, Yen, and Swiss Franc. Among the sharpest increases
in yield, the 2 years Treasury Note stood out as a champion (the yield increased from 1.6% to to the current 2.41%). This was one reason for including this Note as a member of the GYN Trio. Another reason, was that the 2-years Note is closely correlated with the Fed fund rate and is believed to presage interest rates actions by the Fed.
Until recently, interest rates had not been considered in our reports on Gold and other currencies because, under the financial conditions produced by the subprime debt crisis, any increase was expected to occur much later and be much more gradual.
GYN Monitor and Updates
In the weekly GYN monitor updates, Gold will be monitored in terms of price relative to its 26 and 40 weeks simple mavgs. The exchange rates of the Swiss Frank and Euro will not be covered routinely but when included they will be cosidered in terms of their percent above PPP.
Current situation
The rationale elaborated above for selecting the GYN Trio and using it as a framework forfuture evaluations of the near term outlook for Gold, is illustrated in the combination Chart presented below. For a broader context, component charts of the Euro and US Dollar (DX Index) are also included. In addition, for ease of visualization, the component chart of the US Dollar is shown both in its normal orientation as well as in its "flipped" upside down orientation.
From even the must cursory perusal of this chart, there is no mistaking the identical time and extent of the reversals involving the T-2 years Note, Gold, and Japanese Yen. The decline of the Swiss Franc was similar to that of the Yen while that of the Euro was much more limited. Conversely, the US Dollar rallied and the extent of the rally was similar to that of the Euro's decline. This is consistent with the fact that the Euro carries the largest weight in the Index (about 60%) .
| Combo Chart - Major currencies and US Dollar Index |
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| Charts courtesy of stockcharts.com-April 25, 2008 |
Gold's current situation
At the end-of-the-week price of $886, Gold reduced the per cent of the price above the 40 week mavg down to 7.9 (Chart 1).
If the price were soon to fall sightly below the 26 wks mavg as in 2006, the price would decline to $852 (Chart 2 left). The current support of the 40 wks mavg is at $811 (Chart 2 right). If the price were to follow a profile similar to that of the 2006 correction and reach the 40 wks mavg major support several weeks from now, the price would not be expected to fall below $852.
At the end-of-the-week price of $886, Gold reduced the per cent of the price above the 40 week mavg down to 7.9 (Chart 1).
If the price were soon to fall sightly below the 26 wks mavg as in 2006, the price would decline to $852 (Chart 2 left). The current support of the 40 wks mavg is at $811 (Chart 2 right). If the price were to follow a profile similar to that of the 2006 correction and reach the 40 wks mavg major support several weeks from now, the price would not be expected to fall below $852.
| Chart 1- Gold as of May 1, 2008 |
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| 3 % above 40 wks mavg |
| Chart 2 - Computer Simulation of Gold prices |
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| Gold price at supports of 26 and 40 wks mavgs |
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