The dollar "strut jump" jumped to a new level. Why is the gold bulls rushing forward?

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On Tuesday (October 25), the US dollar index rose more and more as the Fed’s rate hike expectations continued to heat up. The bulls finally reached the 99 mark after several days of continuous attack. In August, the US S&P/CA SE-SHILLER 20 big cities house price index performed brilliantly and became the direct trigger for the dollar's long-term outbreak. In response to the dollar outlook, the market has once again seen a completely different view. Some investment banks believe that the 100 mark is just around the corner, while other institutions warn that the dollar's gains have peaked. As the dollar bulls "returned from the overlord", non-US currencies shunned the three houses, and the pound fell particularly badly. However, spot gold, which is usually negatively correlated with the US dollar index, has not risen.

The housing price index of the 20 largest cities in the United States announced on Tuesday rose sharply. Coupled with the sharp rise in interest rate hikes during the year, the dollar bulls finally broke out.

According to a survey released on Tuesday, house prices in 20 major cities in the US S&P/CASE-SHILLER rose by 5.1% in August from a year earlier. Analysts surveyed by Reuters reported an increase of 5.0%, and a growth of 5.0% in July.

(Source: FX168 Financial Network, Zero HedGE

US August S&P/CASE-SHILLER 20 metropolitan housing prices index rose by 0.2% from the previous month after seasonal adjustment, analysts estimated a 0.1% increase. July is flat.

House prices that were not seasonally adjusted in August rose by 0.4% from July, in line with estimates, rising by 0.6% in July.

The president of the US S&P Dow Jones Index Committee, Blitzer, said that the increase in US housing prices continued to expand due to the moderate economic growth.

According to Zerohedge, the unrestricted house price index in August regained all the decline and rebounded to its highest level since June 2006. All 20 major cities have seen house prices rise year-on-year (14 cities recorded a month-on-month increase), but we note that this data lags behind disappointing home sales data in September.

However, the data released by the World Large Enterprise Research Association (Conference Board) subsequently revealed that the US consumer confidence index in October was lower than last month and was not as good as expected.

According to the World Enterprise Research Institute, the US consumer confidence index for October was 98.6, which was estimated at 101.0. It was revised to 103.5 in September and the previous value was 104.1.

(Source: FX168 Financial Network, Zero Hedge)

Lynn Franco, director of economic indicators at the Chamber of Commerce, said consumer confidence fell in October and the current business environment and job market were slightly negative. Consumers’ views on the income outlook remain unchanged. Overall, the economy continues to expand, but at a moderate pace.

In the recent past, US retail sales, consumer price index, industrial output, and employment economic data have performed brilliantly. Today's housing prices undoubtedly confirm the good performance of the current US economy.

This has further boosted the Fed’s expectation of raising interest rates during the year. According to the financial blog Zero Hedge, since the Brexit referendum in June, the Fed’s interest rate hike in December has soared, and then the US dollar index has been strongly echoed, with a cumulative increase of nearly 7%, the fastest in 18 months. Speed ​​up.

(Source: FX168 Financial Network, Zero Hedge)

According to Bloomberg, the US federal funds rate futures contract implies that the Fed’s interest rate hike in December soared to 74.2%, only 55.4% a month ago, four months ago (when the UK had just left the EU) it was only 7.7%.

(Source: FX168 Financial Network, Bloomberg)

According to the "Federal Watch Tool" produced by the Chicago Mercantile Exchange (CME) based on the US federal funds futures trading, the market expects the probability of a rate hike at the Fed meeting in November this year is only 9.3%, and is included in various interest rate hike expectations. The probability of the Fed raising interest rates in December this year is as high as 78.5%.

After the house price index was announced, the US dollar index broke through the 99 mark in one fell swoop, hitting a high of 99.12, the highest level since February 2, and then oscillated down.

(US dollar index 15 minutes map source: FX168 financial network)

San Francisco Fed President Williams said in an interview with The Wall Street Journal on Monday that he still expects the Fed to raise interest rates this year. The November and December meetings are possible, but it is better to wait a little longer because the December meeting is over. After the Federal Reserve Chairman Yellen will hold a press conference, there will be no such conference after the November meeting.

Williams said that he still supports a gradual rate hike. He believes that the Fed has a space for a slow rate hike. The US economy is very suitable for raising interest rates. It is suitable for raising interest rates this year and adding a few times next year. He expects the unemployment rate to fall to 4.75% or lower; inflation will reach 2% in the next year or two.

At the same time, the Fed's "big dove" and Chicago Fed President Evans said on Monday that as long as inflation expectations and the job market continue to improve, the Federal Reserve will raise interest rates three times before the end of next year. Evans is one of the Fed’s most outspoken policy dovish officials.

"According to my growth forecast, I can imagine that the appropriate policy is to raise interest rates three times before the end of 2017," Evans told reporters after his speech.

Wall Street Journal reporter and "Fed News Agency" Jon Hilsenrath pointed out that the possibility of the Fed raising interest rates in November is very small; Fed officials are not willing to disrupt the market before the US election in November, and the election itself may disrupt the market.

It also pointed out that the December meeting is most likely to raise interest rates by 25 basis points; the market is expected to be basically in line with the Fed; the Fed’s expectation of moderate output growth, steady employment growth and inflation stabilization is confirmed, and the Fed is likely to take action.

Hilsenrath said: "The difficulty is that Fed officials need to work hard to hint at the possibility of taking action at the last policy meeting this year on December 13-14. From market expectations, they may not need to release a strong rate hike warning. Signals, data from the CME Group (CME), show that futures market traders have bet that the Fed’s interest rate hike in December is 74%. This means that the November policy statement may be similar to September. Fed officials In September, it was said that the possibility of raising the benchmark federal funds rate is increasing, but they hope to wait a little longer so that there is more evidence that the economy is strengthening."

The expected rebound in the Fed’s rate hike suggests that foreign exchange traders have not yet fully digested the Fed’s prospects for a rate hike in a few months, suggesting that the US dollar index has room to further extend the gains since August when the economy is growing at a faster pace and inflation is picking up. .

“This is a direct response to the Fed’s rate hike expectations,” said Adam Cole, head of global foreign exchange strategy at Royal Bank of Canada.

Keisuke Hino, a foreign exchange dealer in Mizuho Bank in New York, said: "The strong dollar trend remains unchanged, the exchange rate trend follows the yield, and the Fed rate hike is expected to push up the US Treasury yield, which in turn supports the dollar."

Credit Suisse recently pointed out in a report that the US dollar index (DXY) has soared recently, breaking through the top of March and the 78.6% retracement of the 2015/2016 bear market at 98.58/67. The US dollar should test the top of the medium term range at 100.39/51.

(Source: Credit Suisse)

The article pointed out that the bottom of the year since the end of 2014 indicates that the exchange rate will break through this position and expand the upward trend, with the target pointing to 101.80.

However, BNP Paribas said on Tuesday that the market expects the Fed to raise interest rates in the fourth quarter by more than 70%, while the STEER framework shows that the US dollar has already surpassed the interest rate market.

According to the analysis of the position of the Bank, the long position of the US dollar has accumulated rapidly and returned to the early 2016 level. The Bank is still cautious that the downturn in the risk environment or the poor data in the US will make the US dollar vulnerable again.

(Dollar position, source: Faba, FX168 financial network)

Coincidentally, Morgan Asset Management, one of the world's largest asset management companies, said that as the Fed limits itself to the rhythm of raising interest rates once a year, the dollar's gains have peaked and US Treasury yields are expected to fall.

Nicholas Gartside, chief investment officer of Morgan Asset Management's fixed income business in London, said in an interview in Tokyo last week that the Fed will only raise the terminal interest rate to around 1% at most, and the next rate hike will be in December.

It also pointed out that this “glacially slow” policy tightening pace means that the dollar’s ​​rise in the mid-August period has come to an end, and the benchmark US 10-year bond yield is likely to be in the next year from the current About 1.77% fell to 1.5%.

As the strength of the US dollar index climbed, non-US currencies such as the euro, the yen, the pound, the Swiss franc, and the renminbi fell sharply. . .

Non-US currency: USD/JPY hit 104.79 yen, the highest at the end of July; EUR/USD fell to 1.0854, a 7-and-a-half-month low; USD/CHF hit a new high of 0.997 over seven months; but the worst It is a pound, and the pound/dollar has fallen below the 1.22 and 1.21 mark due to the triggering of the long stop loss. The lowest hit in the day was 1.2081. . .

(£/USD 15 minutes chart source: FX168 Financial Network)

Along with the rebound of the US dollar, spot gold unexpectedly did not retreat, but it rose strongly. The US market hit a high of 1,273.36 US dollars per ounce, and the short-term strength rose strongly.

The strong demand for physical gold in India has brought support to the gold price, but the Fed’s interest rate hike is still expected to limit the increase. Gold is highly sensitive to interest rate hikes, as interest rate hikes will push up the opportunity cost of holding interest-free gold, and in turn support the dollar, which is priced in dollars.

Analysts said that Indian gold demand will continue to rise due to the festival season, including Dhanteras and Diwali at the end of this month, which is the two most important festivals in India, and gold is usually a gift.

Robin Bhar, head of metal research at Societe Generale, said: "Gold in the Indian market is clearly supported by physical purchases, and the price of gold is slightly higher." He index, the higher premium is the signal of physical gold purchase.

At the same time, the market seems to be more cautious, gold is still trading in a narrow range, Fed officials' hawkish statements and optimistic economic data suggest that interest rate hikes are still possible at the end of this year, which is a suppression of gold.

Jens Pedersen, senior analyst at Danske Bank, said: "Before the Fed makes decisions, we need to monitor the data and interpret the data. Now the doves and hawks are arguing."

MKS Pamp said in the report that technically, gold has support at the position of $1250-1260/oz, preventing the decline. “Because the market has taken into account the 70% probability that the Fed will raise interest rates in December, it is difficult for gold to fall too much from its current position in the short term.”

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