LiteFinance / プロファイル

Gold requires financial repression
Gold traders rely on the Fed
The world’s leaders compared their fight with the coronavirus with the world war. This war won’t end after COVID-19 is defeated, as the governments will have to repay huge debts. In the US alone the public debt will be up from 109% to 131% of the GDP in 2020. According to Goldman Sachs research, the debt-to-GDP ratio is developed economies will hit the levels recorded in the 1940s. At that time, to avert the growth of borrowing costs, the Fed introduced financial repression, including the Treasury yield control and setting the rules encouraging investors to hold such securities in the portfolios. If the US central bank uses the experience of the past, the gold price will surge.
Gold has featured a strong response to the outcomes of the FOMC June meeting. Jerome Powell made investors doubt in the V-shaped recovery of the US economy, and so, 10-year Treasury yield went back to 0.7%. The growth of the bond market rates in early summer was excessive and could hinder the GDP return to the trend. The gold market is quite responsive to the changes in Treasury yields. So, the Fed’s willingness to buy $80 billion in government bonds per month has encouraged the bulls. According to Gain Capital Group, this is a perfect scenario for XAU/USD. Concerns about slow recovery of economic growth and an unlimited monetary stimulus support the gold uptrend.
If the Fed manages to hold the bond market rates, the decline of the real yield amid a gradual acceleration of the inflation will support the price growth of the precious metal. Other growth drivers for the XAU/USD could be the weakness of the dollar and the stocks rally. The greenback is now seen as a main safe haven, so deterioration of the epidemiological situation in the USA has strengthened the US dollar, weighing on the S&P 500, which has somehow discouraged gold buyers. The gold price has been down to the important support at $1715-$1720 per ounce, the bulls need to hold the support up.

In my opinion, the success of the European countries in the fight with COVID-19 should suggest that the euro-area economy will recover quicker than the US. Do not forget that the EU is an export-led region, its close trade relations with China will play an important role in the future. The euro-area economy was hit by the US-China trade wars as much as China. However, in the present environment, the recovery of China’s economy is a very positive factor for the EU. Given the significant share of the euro in the structure of the USD index (57%), the downtrend of the US dollar will start sooner or later. This scenario could be canceled if the White House starts a new trade war, which is not advantageous under the current conditions. The escalation of the US-China trade battle will trigger the S&P 500 sell-off, which will press down Donald Trump’s approval ratings.

Therefore, gold buyers may count on such benefits as the decline of the Treasury real yield and the greenback’s weakening. Therefore, I would recommend buying gold if the gold price breaks out the resistance at $1745-$1750. The target could be set at $1830.
Dynamics of government debts

Fed doesn’t want a weaker dollar
Jerome Powell’s dovish tone hasn’t supported the EUR/USD rally
The US strong jobs report for May should have encouraged the Fed to demonstrate confidence in a soon rebound of the US economy after the shock resulting from the pandemic. However, Jerome Powell did what he should. The Fed’s chair didn’t make the mistake of the former central bank’s presidents. During the Great Depression, the Fed did not provide an extra stimulus, which resulted in the W-shaped economic recovery. During the previous recession, the central bank suggested normalizing the balance sheet too early, which send the S&P 500 28% down in March 2009, following its surge by 24% in January up from the low hit in November.

“We’re not thinking about raising rates, we’re not even thinking about thinking about raising rates”. All FOMC officials believe that the federal funds rate will remain at level 0%-0.25% through the end of 2021. 15 out of 17 members believe interest rates to remain at zero through 2022. The Fed’s projections emphasize that the US economy will take a long time to recover. The US GDP should contract by 6.5% in 2020, it will increase by 5% in 2021. The unemployment rate will be 5.5% in 2020, inflation – 1.7%, which is lower than the pre-crisis indicators. The Fed seems to believe that the US economic recovery will be slow, similar to the Nike logo when the downturn is first followed by a short bounce back, however, then comes a long period of the economy moving towards a trend.

Remarkably, the same is suggested by the OECD. It says most people see a V-shaped recovery but it is going to stop halfway. The OECD suggests the global economy will be 6% down in 2020, the US growth will contract by 7.3%, the euro-area economy will contract by 9.1%. Nonetheless, in 2021, the US GDP will expand by 4.1%, the euro-area growth will be 6.5% up.
I believe that, just as the S&P 500 is growing on expectations of improved corporate earnings in the future, the EUR/USD rally should continue due to the growth-gap between the euro area and the USA next year. Jerome Powell could have fueled the situation and weigh on the dollar if he had announced the Treasury yield control policy, but he didn’t. The Fed decided to fix the monthly volume of Treasury purchases and mortgage bonds at the levels of $80 billion and $40 billion. Its interference in the debt market is gradually fading away. In late March, the central bank was buying assets at a weekly pace of $375 billion, in late April, it bought $50 billion per week, and in early June, the central bank purchased $20 billion. The Fed probably believes that a fixed volume of purchases will be enough to stop the increase in the Treasury yields.

In general, The Fed has done what it should. Suggesting rather gloomy projections, it left the door open for the further expansion of the monetary stimulus. That is what financial markets need now. Unless there are no strong shocks, like the second wave of COVID-19 or a new round of trade wars, the S&P 500 may break through its all-time high already this year. If so, the EUR/USD can well meet my December forecast, suggesting the pair be at 1.14 and 1.16 in the middle and at the end of 2020. It is still relevant to buy the euro on the corrections down.
Dynamics of global GDP

Dollar lets out doves
EUR/USD is up to three-month highs as Jerome Powell is expected to sound dovish
The best is the enemy of good. The Fed is in a difficult situation after the publication of the US jobs report for May. The drop in the unemployment rate and the biggest surge in employment since the end of World War Two suggest the V-shaped recovery of the US economy, which is expected by the White House. The Fed was opposing this idea until recently. According to Jerome Powell, it will take a long time until the US GDP is back to the pre-crisis growth pace. This should require an extra fiscal stimulus. Strong domestic data allow the US central bank to sound more optimistic than it did before. However, optimism could drop the US stock market.

Powell has some negative experiences. In late 2018, his announcement that the current interest rates were far from being neutral started sell-offs of the S&P 500. The Fed’s chair must be extremely careful. Ahead of the publication of the FOMC June meeting’s outcomes, markets expect Powell to sound dovish. That is why the EUR/USD has rebounded up from the support at 1.124-1.1245 I suggested earlier and increased by an entire figure. Investors expect the Fed to express the willingness to hold the interest rates low for some years and signal the Treasury yields targeting policy. Both factors are bearish for the US dollar, which is also weighed on by the seasonal factor. In June, the USD index fell in eight cases out of the past ten by 0.7% on average.
The greenback has been ahead of the plan so far, as it has been more than 2% down since early June. However, investors are still willing to buy the EUR/USD. According to DoubleLine Capital, the US twin deficit (budget deficit and foreign trade deficit) should increase to 12% of GDP, and the dollar should be back to the levels of 2011. The euro is supported by the EU huge fiscal stimulus, which could mitigate the recession in the euro-area. Besides, amid aggressive rate cuts by global central banks, the ECB negative interest rates are not so harmful to the euro as they were before.

On the other hand, the rise in the Treasury yields and a lower chance that the Fed will cut the federal funds rate below zero are positive factors for the US dollar. These benefits of greenback can be neutralized if the Fed starts yield control policy, which should happen in September, according to Bloomberg. Investors can be lured back to the US dollar if there is COVID-19 second wave or a new round of trade wars. Unless this happens, the main scenario suggests the EUR/USD should rise to 1.147 and 1.155, and it will be relevant to buy the euro on the corrections down, as I wrote before. However, Jerome Powell’s carelessness and the fact that the euro-dollar rally ahead of the publication of the FOMC June meeting’s results implies the Fed’s dovish tone may become a reason for a drawdown.
Dynamics of Bloomberg USD index

The dollar gave a pleasant surprise
The US employment rebounds quickly, which signals the recession has been the shortest in the US history
A downturn ends when the economy starts expanding. The US employment was up in May at the highest monthly pace since World War Two (+2.5 million), the US current US recession is going to be the deepest but the shortest since the 1930s. Despite the gloomy forecasts suggesting the rise in the unemployment rate to 20%, the indicator has been down from 14.7% to 13.3%, which sent the US stock indexes 3% up and encouraged the EUR/USD bulls to take the profits. When everyone is buying, it is a good chance to sell. The US dollar has strengthened due to this principle, the optimism about a quicker rebound of the US GDP than the global indicator, and the growth in the Treasury yields.
The euro’s three-week rally must have resulted from the signs of the unity in the euro area amid a considerable boost of the fiscal and monetary stimulus. According to the Bundesbank, which suggested the growth of Germany’s GDP by 3.2% and 3.8% in 2021-2022 following a drop by 7.1% in 2020, tax cuts in Germany and other support measures will add a percentage point to the GDP growth pace next year. Besides, I think it makes sense to exit the euro longs, as almost a 6% rally of the EUR/USD since late May suggests that most of the positive has been priced in the pair’s quotes. It is now relevant to sell, as many investors, encouraged by the pleasant surprise made by the US jobs report, are buying.

Will the euro sell-off continue? The clue should be given by Donald Trump and the Fed. The US president again threatens the EU to increase the import tariffs on European cars. The White House, as in the case of China in 2018-2019, starts with small steps. Trump claims that the Canadian lobsters are imported duty-free by the EU, while there is an 8% duty in the block for American live lobsters. If the EU doesn’t drop its tariff, the US will impose a new tariff on the EU cars. The same is also acute for China, which imposed a levy on the US live lobsters. The global economy, as well as China, is already weak amid the pandemic fallout, and a new round of trade wars will further weaken it. China’s economy is gradually recovering. In May, China's foreign trade surplus was up to the record level of $62.9. This should support GDP growth.
Will the Fed weigh on the US dollar? The huge volumes of the Treasury issuance (it is about $3 trillion in the second quarter, which is equal to 15% of GDP), an increase in the US employment and inflation rate encourages investors to buy risky assets and sell the government bonds. The growth of the Treasury yields will hinder the economic recovery and boost the debt servicing costs. Under such conditions, the Fed could follow the experience of BoJ and the RBA, which means the bond yield targeting. This will deprive the greenback of its important advantage. If so, it will be relevant to enter the EUR/USD longs when the price rebounds from the supports at 1.124 and 1.12.
Dynamics of employment and unemployment in the USA

The dollar did it!
Is Greenback the reason for US stock market madness?
When the US stock market recovered after the 2009 crisis, they called it “the most hated rally in history”. Back then, most investors became hostages to their own scepticism as they had believed that a recession that large would make S&P 500 collapse much deeper than it actually did.

The current recovery of US stock indexes has lasted for about 10 months, but it has already become a new “most hated rally”. The markets are far from reality, shares go off like hot cakes and S&P 500 behaves like a true woman. Women usually prefer being beautiful to being smart because men usually prefer watching to thinking.

FOMC officials, Wall Street Journal experts, Ways and Means Committee and other competent organisations say that a V-shaped economic recovery is no longer a matter of fact, but the market doesn’t want to search for any other letters. The unemployment rate soared to 20%. The States plunged into the deepest recession since the Great Depression. Donald Trump continues putting pressure on China and Beijing halts imports of US agriculture products. But S&P 500 pays no attention to geopolitics, recessions or mass protests:

- Listen! Don’t even try using fake money in shops.

- They won’t strangle me for that and start a revolution, will they?
If the number of new coronavirus cases isn’t rapidly growing amidst US riots in the next few days, it will be really suspicious. The Fed representatives hint at new stimulus packages and a W-shape recovery that the second epidemic wave will lead to. However, when stocks grow so fast, the sense of fear vanishes. Many are afraid of missing out on the opportunity to buy and they just buy, and buy, and buy.

Mom would tell me you’re an idiot. Your own mom!

Some things make no sense: in the market there are rumours that the main reason for S&P 500’s rally was the weakness of the USD. They say the fall of the USD index boosts US companies’ competitiveness and their corporate profit. But for that to be true, there must be a time lag between the two events. I’d rather believe that stocks buying increased the share of dollars in investment portfolios as the USD is a tool hedging against a poorer global appetite for risk. The appetite didn’t and will hardly get worse as the global economy is recovering. So, they are just getting rid of the greenback. But isn’t it too early?
The higher euphoria, the stronger disappointment. Beware! S&P 500 still has many reasons for falling and bulls may be duped at any moment.

Euro is looking at the markets Forex and stock market trends signal a soon recovery of global and European economies What came first, the chicken or the egg? Do markets reflect what is going to be in the economy, or the economy is driving the markets in a particular direction? When I look at the S&P 500, I see a soon V-shaped rebound. This is what the markets signal, although the Fed’s officials, the members of the Congressional Budget Office, and numerous experts say that the US GDP recovery will take a long time. When I look at the GBP, I see at least the extension of the Brexit deadline or even a soon signing of the trade deal between the UK and the EU. Although Boris Johnson’s government is unwilling to follow either of the scenarios. Yes, euro gains back its old benefit, the hope that the Brexit matters will be settled down easily. The divorce, in any sense, is not an easy matter. Divorce is associated with significant financial costs in exchange for independence and peace of mind. The divorce of the UK and the EU is no exception. Both sides will suffer, and most of the negative was priced in the sterling’s quotes until recently. Once investors gained back the hope for the Brexit deal, they have started exiting the GBP/USD shorts. According to Bloomberg's source familiar with the matter, the European Union will try to convince Boris Johnson to forge a compromise later this month in an attempt to stop the U.K. from breaking away from the bloc without a trade deal. The stronger pound supports the euro. The euro-dollar risk reversals have entered the positive area for the first time since March, which signals the EUR/USD market is bullish. The euro’s rise is natural as the US stock indexes are rallying up although many controversial facts. There is a risk of the second wave of COVID-19, there are mass protests in the USA, the US-China trade relations are still tense. Moreover, the White House resumed the case of digital taxes in the EU in relation to US companies, which may result in new tariffs against the European Union. The growth of the global risk appetite has sent the USD down to its three-month low, and the sharks of Wall Street suggest that the greenback’s uptrend is about to turn down. According to Citigroup, as the Federal Reserve slashed interest rates to near zero and the potential growth of US GDP is lower than in the rest of the world, the dollar enters a bear market that should last from 5 to 10 years. A similar opinion is shared by Goldman Sachs, JP Morgan, and Deutsche Bank, which recommend their clients to reduce the share of the US dollar in the portfolios. The euro is also supported by the talks that Germany is to boost the fiscal stimulus by €50 billion - €100 billion and the hopes that the ECB will expand the QE size by another €500 billion. I think these factors have been already priced in the EUR/USD. If the ECB is not fast enough to take more stimulating measures or gives less than the market expects, the market can experience the same turmoil that was in March, when Christine Lagarde recklessly stated that the European Central Bank is not responsible for controlling the spreads of the debt market. The first targets for the euro longs at $1.115 and $1.12 have been already reached, the next upside targets at $1.122 and $1.124 are close. The ECB meeting should allow taking some of the profits. Dynamics of EUR/USD risk reversals

Euro: save Rome or die ECB tries to prove that Italy’s central bank is strong enough to support the economy during the pandemic When the market is too optimistic, the good news is eagerly discussed and the bad news is ignored, I start thinking that it is the right time to exit. While Donald Trump is considering retaliatory measures to China because of Hong Kong, the S&P 500 is growing despite the deepest recession of the US economy since the Great Depression, the increase in the unemployment towards 20%, and the gloomy forecasts of the Congressional Budget Office. The CBO has lowered its GDP projection for 2030 made up in January by $15.7 trillion, suggesting the US economy should shrink by 5.6% in 2020, and the US economic recovery should take several years. The S&P 500 is just one growth driver among several ones encouraging the EUR/USD bulls. During the stress in the financial markets, investors turned to safe havens, first of all, the greenback and Treasuries. However, once the global economies are being reopened, investors are lured back to risky assets. The USD index has been falling over the past few days, the 30-year Treasury yield reached its highest level since March 20. Nonetheless, the US-China trade relations are still uncertain. According to Bloomberg's source familiar with the matter, China has told state-owned firms to halt purchases of farm products from the United States after Washington said it would eliminate special treatment for Hong Kong to punish Beijing. China may not meet the obligations under the phase 1 trade deal signed in January. The euro is also growing amid the French-German fiscal stimulus offer, the announcement of the European Commission about issuing bonds worth €750 billion, and the hopes for the expansion of the ECB’s €750 billion Pandemic Emergency Purchase Programme. Investors expect that Italy’s bond yields continue falling, and the Italy-German yield gap will be narrowing, which should finally defeat the Eurosceptics. Christine Lagarde is going to save Rome, and Italy is often compared with Japan. The same aging of the population, the same endless struggle for inflation growth...Nevertheless, Japan has its central bank, and the ECB has to prove that Italy's central bank is also strong. In addition to the QE boosting, the ECB may also start purchasing fallen angels and reinvesting incomes from the long-term asset-purchase program. The fiscal and monetary stimulus push the EUR/USD up and make banks revise their projections. HSBC sees the pair at 1.1 in late 2020, up from the previous forecast of 1.05, amid the drop in the risk of the euro-area breakup. Furthermore, the forecast of Bloomberg experts also suggests the EUR/USD be at 1.1. Nonetheless, the French-German plan hasn’t been approved yet, and the EUR/USD bulls could be set back as the ECB is not taking active measures right now. These facts, as well as the escalation of the US-China trade war, may force investors to start exiting longs. After all, the euro can still rise above $1.115. Dynamics of debt-to-GDP ratio in Italy, Japan, and the USA

Gold: the pandemic starts and ends, but the liquidity remains The way the Fed follows the experience of other central banks will determine the gold future trend I am entertained with the headlines of the articles devoted to the gold market. Something like “Gold is down amid the reopening of the US economy and the rally of stock indexes”, “Gold price is rising as investors are concerned that Trump will take serious measures against China as the retaliation for Hong Kong”. The US didn’t impose tough sanctions against China, but the XAU/USD is still rising. Why? They say this is because of the riots in the US after the killing of an African American by the police. But the US stocks are still growing! Yes, because investors ignore those protests. I remember an old joke about two analysts speaking: Do you understand what is happening in the market? - Yes, let me explain… - No, thanks! I can explain this myself, but I still can’t understand... In my opinion, such controversial headlines of the tabloids, like there were two or three days ago, occur because their authors do not understand what is really going on. I will try to express my own opinion, which, however, may not be the universal truth. The price of any asset forms also because of the actions of big traders that are based on an investment idea. In most cases, this is an idea suggested by fundamental factors. Besides, the patterns in economic studies are as often as the technical patterns. The global economy is in the recession, so we can base on the gold trends that were typical during the former downturns. At those times, the market favored the idea that the inflation rise, spurred by the huge monetary stimulus, would push the gold future up above $2000 per once. The time was going, the gold price was growing and reached its all-time high at $1920 in 2011. However, the CPI and the PCE didn’t accelerate. Big traders realized that they had been wrong and started exiting longs, which broke the XAU/USD bull trend. History is not only repeated but also rhymed. The current monetary stimulus is greater than the previous one, however, banks and hedge funds are unwilling to repeat the old mistake, so they started exiting longs in late May. This is because inflation is not rising. Moreover, the demand can be weak for a long time due to the pandemic, which is clear from the dynamics of 10-year inflation expectations. Expected annual inflation in the USA and Europe As a result, the gold price rebounded from the top of the middle-term consolidation range of $1635-$1775 outlined in the previous gold analytics. If the price hadn’t remained above $1700, the correction could have continued. However, the Fed’s officials started talking about the yield curve control. According to the president of the Federal Reserve Bank of New York John Williams, this idea is being considered, and the experience of other countries is being analyzed. If the central bank keeps the bond market rates at a fixed level, the inflation rate should start rising (the pandemic starts and ends, but the liquidity remains). This will send down the real Treasury yield, and the gold price should be rising to at least $1830 per ounce. The US Treasuries are the main rival for gold, and a drop in Treasury yields encourages investors to increase the share of gold in the portfolios. Expected annual inflation in the USA and Europe

Forex in June: the impossible is possible
The growth of global risk appetite, which looked incredible in April and unnatural in May, can continue in June
In Forex, like in a casino, the most important is to stop at the right time. Based on the statistical analysis with fundamental components, I recommended exiting the EUR/USD and GBP/USD shorts at the end of May. Just these two operations could have increased the deposit by 6%. Alas, but the strong euro rally at the end of May has a little spoiled the whole situation. The shorts on the EUR/USD and EUR/JPY yielded losses of about 3.3%, and shorts on the GBP/USD and GBP/CHF resulted in a loss of about 3.9%. Greed may lead to losses. However, I have many times stressed that seasonal regularities should be used in addition to the fundamental and technical analysis.

June is a good time for commodity currencies. Since 1975, the AUD and CAD strengthened versus the US dollar in 27 cases against 18. The NZD performed a little worse, however, it also rose against the greenback. The idea to buy the AUD/USD and sell the USD/CAD is not new, I have recently written about this based on the lockdown stringency.
The pound is usually weak in May amid the dividend payments to foreigners, which has been again proven in May. However, history proves that the situation radically changes in June. The sterling, as a rule, is among the best-performing currencies in June. The GBP median performance is behind only the AUD and the NZD. The median value was lower due to the GBP/USD sale-offs in 1975 (-6.1%), 1981 (-6.8%), 1988 (-7.9%), and 2016 (-8.4%). In the latter case, the sales resulted from the referendum on the UK membership in the EU, whose fallout is still present. For example, Boris Johnson should participate in the EU summit in June. If the UK Prime Minister makes a step towards the agreement with Brussels or extends the Brexit deadline, this will be a positive factor for the pound.
I should note that the greenback was usually rather weak in June, which under the current conditions means the S&P 500 rally should continue. According to James Bullard, the president Federal Reserve Bank of St. Louis, if the US GDP features the worst drop in the second quarter, it should feature the best performance in the third quarter. There is still some hope for the V-shaped recovery of the US economy. Besides, the growth of the US stocks, usually followed by an increase in the global risk appetite, is a good reason to use the excellent trading conditions offered by LiteForex and buy income-earning assets. However, do remember the rule that, in Forex, like in a casino, the most important is to stop on time. Even in the best times, the AUD and the CAD rose by just 1.55% and 1.12%.
Supported by the unity and generosity of the EU, the euro is rising. However, taking into account the seasonal strength of the Swiss franc, I would hedge the EUR/USD longs by the EUR/CHF shorts, betting on the high volatility of the world’s major currencies, which suggest moderate targets.
Periods of rise and fall

Gold market
Gold market: peculiarities of pricing and structure
When trading commodities, it’s important to be aware of their demand&supply’s structure and dynamics. A typical example is oil, which is recovering lost positions by leaps and bounds amid expectations of growing demand and surplus reduction, as main global economies have started to reopen. Unlike Brent and WTI, gold is less sensitive to the physical asset market’s state. However, it can punish any time a trader who ignores fundamental analysis.

Jewellery production and investment prevail in the gold global demand structure. In 2019, they accounted for 48.5% and 29.2% of demand, respectively. Central banks’ share in gold purchases was 14.8% while industrial use accounted for 7.5% of gold consumption. The latter indicator is important. The thing is it is much higher for silver. The shutdown of industrial enterprises led therefore to a faster slump of XAG/USD if compared with XAU/USD. As a result, the gold-silver ratio soared to historical peaks. Against the backdrop of the recovering global economy, the ratio may be expected to drop. It means, we’d better bet on silver’s faster growth against gold.
The relative share of investment in the structure of the gold global demand grew up to 49.8% while the share of jewellery production dropped to 30.1%. Consumption of gold reduced almost in all sectors, except for ETFs and coins, as compared with October-December and January-March 2019.
A change in a demand structure is an important pricing factor. When it happens, we may say a current trend is stable. The shift from jewellery to investment is a clear sign of bulls’ market dominance. Jewellery is too expensive and its consumption is falling. On the contrary, the faster ETFs’ reserves grow, the higher their quotes are and the bigger their buying army is. They sometimes say, gold flows from east to west in an uptrend. True, in 2019 the relative share of China and India in the jewellery’s gold consumption structure was 67%, while the main ETFs are located in the USA, including the biggest fund SPDR Gold Shares, and Europe.

The main producers of gold are China (404.1 t), Australia (314.9 t), Russia (297.3 t), USA (221.7 t) and other countries. Supply’s influence on the price is limited. The year 2013 is a bright example. Many said then XAU/USD quotes couldn’t drop below $1,300-1,350 per ounce as it was gold producing companies’ break-even. They said production would be cut to provoke a deficit and a price growth. But in fact, existing hedging technologies allowed companies to fix the price and continue producing the same volumes of gold. So, gold fell even below the expected levels and buyers were punished for their extreme self-confidence.

At the same time, supply shouldn’t be fully ignored. In 2020, investors felt a critical shortage of the physical asset when trading forwards amidst the pandemic and shutdowns. As a result, gold premiums grew in the USA and Europe and XAU/USD quotes rose as well.
So, investment demand is an important factor in gold pricing. Its volume is mostly affected by central banks’ monetary policies. Massive monetary expansion contributes to weakening major currencies, dropping bond yield and raising XAU/USD quotes.
Dynamics of global demand for gold

All roads lead the euro to Rome
EUR/USD will rally up if the EU adopts the offer made by Emmanuel Macron and Angela Merkel
The ECB is willing to save Italy, but will the EU agree? According to the Bank of France Governor Francois Villeroy de Galhau, using the capital key, when the QE size is associated with the size of the economy, is not necessary for the emergency program. Germany, whose GDP should drop by 6.5% in 2020, is likely to receive the most benefits, while Italy’s, Spain’s and Greece’s GDPs will lose more than 9%. The European central bank is willing to not only boost the QE volume but also break its own rules, which is a positive factor for the euro. However, little depends on Frankfurt, the key decisions will be taken in Brussels.

The EUR/USD rise to 1.1 amid the news about the French-German plan for a €500-billion recovery fund is natural. European governments support unity. However, not all member-states support this idea. Austria, Sweden, Denmark, and the Netherlands stated their opposition to grants, calling for a loans-based approach instead. Only 32% of the investors polled by ExanteData believe that the EU will fully accept the proposal of Paris and Berlin. 38.2% of respondents suggest that the plan should be corrected. This is a bear factor for the euro, allowing selling the EUR/USD on the rise.

The major problem is in Italy, whose economy stopped expanding after the introduction of the single European currency, and the US stocks started to outperform the euro-area peers.
Unless Rome receives enough support, it makes no sense to be an EU member. The risks of the euro-area breakup will press the EUR/USD down. However, the French-German plan could still be adopted at the EU summit, which will allow the euro to rise.

In the meanwhile, the euro-dollar trend mostly depends on the US stock indexes, as investors are weighing which is a more important factor, the reopening of the global economies or the escalation of the US-China trade war. According to the Netherlands Bureau of Economic Policy, international trade in March contracted by 1.4 M-o-M and 4.3 Y-o-Y, which is the worst drop since 2009. This is a negative factor for the export-led euro-area economy. However, the indicator should rebound in the May-June period, also because of the active fulfillment of China’s obligations to the US.
US-China trade relations seem to have aggravated. However, Donald Trump wants to be re-elected as the US President, so he needs to put pressure on China. Besides, the escalation of the situation forces China to stimulate its economy to increase the purchases of US goods. Since the pandemic started, PBoC has injected about 5.9 trillion yuan ($ 827.6 billion) in the economy, and it is willing to continue in the same way. This suggests a V-shaped rebound of China’s economy, which in the medium term will support the EUR/USD, currently stuck in the trading range of 1.077-1.099.
Dynamics of international trade

Dollar creates obstacles
EUR/USD bulls are going ahead, but there are no gains without losses
The risk of the euro-area breakup was reduced as Germany and France offered a €500-billion European recovery fund to support the EU countries worst affected by the pandemic. This news encouraged EUR/USD. At the same time, the dispute between Democrats and Republicans in the USA about the terms and size of the fiscal stimulus may support ….the US dollar. The greenback and the euro react to the growing uncertainty in different ways. The dollar has benefits as a safe-haven asset. In this respect, different approaches of the Fed and the US administration to the US GDP recovery have set the EUR/USD buyers back.

Speaking before the US Senate Banking Committee, the Treasury Secretary Steven Mnuchin and the Federal Reserve Chair Jerome Powell offered contrasting views of the US economic prospects. According to Steven Mnuchin, the third quarter could be quite good, and the GDP can well follow a V-shaped rebound. Jerome Powell, by contrast, says the fear of the coronavirus will set the economic growth back. It will take a long time until the US GDP completely rebounds. The same opinion, by the way, is shared by the Congressional Budget Office, which expects the US GDP in the fourth quarter of 2020 will be 5.6% lower than a year ago.

Different views of the Treasury and the Fed are not a new driver. The US central bank has many times emphasized the necessity of an additional fiscal stimulus. Democrats are willing to provide a total package of $3 trillion. However, Donald Trump is yet rejecting this bill. The US President says that extra money given to the unemployed will discourage them from the search for new jobs, which will hold the US GDP recovery back. The US stock market is not confident in additional support, which strengthens the US dollar.

The uncertainty of the S&P 500 is likely to be the major factor weighing on the EUR/USD. The euro is stabilizing due to the offer by Angela Merkel and Emmanuel Macron, the growth of the German indicator of economic sentiment to its 5-year high, the ECB willingness to support the euro-area economy, and the lower risks of the US-China trade war escalation. As a result, the spread between the euro put and call premiums has narrowed to the minimum value since March 17, and the euro-dollar three-month risk reversals have entered the positive area.
According to the U.S. Department of Agriculture, in the 10 weeks ended May 7, gross sales of U.S. corn and pork to China were up by eight times, cotton exports were three times higher than they were in the same period in 2017 before the trade war started, soybeans exports increased by about 30%. China has significantly stepped up purchases of U.S. agriculture products to avert the trade war escalation. This is a positive factor for the export-led euro-area economy, and so, for the euro. The EUR/USD bulls are willing to continue the rally up to 1.1055-1.107. However, the euro has many problems, which are likely to create obstacles for the buyers.
Dynamic of German’s economic sentiment

Aussie is going to be the winner
AUD/USD could break through the two-month highs
After it became clear that China would be the first to win the struggle with the coronavirus, the Australian dollar has become my favorite. The idea to buy the Aussie seemed strange amid the first recession in Australia since the 1990s, the AUD/USD drop to the lowest low since 2002, and the QE launched by the RBA. However, as early as in late March, I saw that, if the global recession had resulted from the pandemic, one should bet on the currencies of the countries that should be the first to manage the pandemic. My basic strategy has been buying the AUD from the zone of $0.59-$0.62 with the targets at $0.675 and $0.69, it perfectly worked out due to the excellent LiteForex trading conditions.

The AUD/USD has been up by 19% from the March lows, and the Australian dollar is now seen as an example to follow by the currencies of the countries hit by COVID-19. Due to China and the growth in commodity prices, Australia’s GDP could recover quicker than the U.S. and euro-area GDPs, which is an important reason to buy the Aussie versus the greenback and the euro. Remember, Jerome Powell says that the US economy will hardly recover until 2021; the ECB says the euro-area GDP will reach the pre-crisis levels only in 2022. Against such a background, it is natural that the speculators, who used to be bearish on the Australian dollar, are now exiting shorts.
Canberra has done a lot to help Australia’s economy recover. The $AU130-billion fiscal stimulus, taking into account the GDP pace, looks one of the most aggressive among the G10 countries. Besides, the RBA, unlike the Fed, didn’t have to boost the balance sheet. Following the Bank of Japan, Australia’s central bank adopted the yield curve control policy, setting the target for the yield on 3-year Australia government bonds at 0.25%, which has proven its effectiveness. The volume of bond purchases is contracting, the market has stabilized, and they may not need to expand the monetary stimulus.
Yes, bears could point to the drop in Australia’s employment by 594,300 in April and the RBA gloomy forecasts that suggest the GDP be down by 10% in the first quarter and by 6% in the entire year 2020, however, all countries are suffering from a downturn now. I would be surprised if any country reported positive statistics.

However, not everything is that bright. China supports the AUD/USD rally, but it can also send the Aussie it down. A typical example is the suspension of the Australian pork imports and the start of an anti-dumping barley import audit by China, which could increase import tariffs to 80%, as China’s retaliation to Australia for its support of the USA in the investigation of the laboratory origins of COVID-19. This idea hasn’t been further developed, so, I expect and improvement in the China-Australia trade relations. Unless there is a new round of trade wars, we can continue to buy the AUD/USD with the targets at 0.675 and 0.69.
AUD speculative positions

Dollar changed the shoes
The White House changed its attitude to the U.S. currency
You could do anything to win the presidential elections! You could also abruptly reverse your own point of view. For most of his presidential term, Donald Trump was a fan of a weak dollar. In May, however, he supports the position of the former U.S. administrations that the strong currency is necessary. And the current US President has his reasons. Amid the huge fiscal stimulus, the focus is switched from foreign trade and competitiveness to the sources of managing the growing budget deficit. Besides, the strong greenback currently seems to be an advantage, as the strong currency indicates the US strong economy.

Donald Trump needs to find the subtle balance line between the US stock indexes and the US dollar, which are moving in opposite directions as investors are very responsive to the risk. Trump always saw the S&P 500 be an indicator of his success as the President. Also, the US stock market crash in March substantially lowered Trump’s chance to win the upcoming presidential election.
Therefore, it is not surprising that the worst drop in the US industrial production (-11.2%) and retail sales (-16.4%) since the government began tracking in 1911 and 1992 respectively, is presented as a bottom of indicators’ fall. They say it can’t be worse than in April. Yes, retail sales account for about 42% of the US consumer spending or 70% of the GDP, and the indicator’s drop by 23% over two months has subtracted, according to the ING, more than 6 basis points from the nominal gross domestic product. But the worst is already over, isn’t it?

One should understand Jerome Powell’s words that it doesn’t make sense to bet against the US economy, and the Fed hasn’t yet run out of the monetary tools. According to the FOMC president, the current recession is not that deep as the Great Depression, though the pre-crisis conditions will hardly be restored until 2021. Such a tone of the Fed’s president and the interpretation of the US domestic data support the S&P 500.

The major growth driver for the US dollar is the talks about the escalation of the US-China trade war. I must admit that the White House successfully fuels the conflict that seemed to be easing. Another portion of the gas in the fire of the trade dispute was poured by the tougher licensing requirements for the companies working with Huawei.

The euro, on the contrary, has many problems pressing it down. After the report on Germany’s GDP for the first quarter, the split among the euro-area members continues growing.
Germany’s GDP is better than that of most European states, also because Germany introduced the measure limiting the economic activity later (on March 23) than other European countries, and the production sector was hit by the crisis less than the services and tourism sectors. Under the current conditions, the EUR/USD pair is more likely to break through the bottom of the trading range 1.077-1.09 than the top.
Dynamics of the S&P 500 and the popularity of Democrats and Republicans

Trade war: to be or not to be?
Donald Trump provokes China but China is different now
When I look at some people there’s only one thing I can think about: how do I get an arms licence? A renewal of the US-China trade war is the last thing the global economy needs now when the pandemic is here. Still, Trump won’t calm down and continues blowing the whistle on Beijing. One day he threatens to introduce import taxes in reaction to the alleged origin of coronavirus from a laboratory and failure to fulfil the obligations to buy American products. Another day, he forbids the US largest federal pension fund to invest in Chinese shares. Another say, he speaks aloud of a total breakup with China, which will allow the States to save $500 billion. Can’t Trump just put his mask on and keep his mouth shut?
China understands the benefits of being the first country that has made coronavirus kneel down. It’s not the same country it was at the beginning of 2020. China has made everyone understand no one can twist it around their little finger. Otherwise they will be given the finger. And if the Americans want to tell the Chinese to go to hell, they will have to see them off until the final destination. Beijing swaps diplomacy for threats more and more often. It stops buying Australian pork in response to Canberra’s intention to start a global investigation into the origins of coronavirus; it blows up rumours of the US plot against China; it encourages the states that are loyal to China. ​

Beijing has started to think again it can outrun the West like it did after the crisis of 2007-2009 when the growth of Chinese GDP helped global economy to recover.

As for Trump, Beijing’s chosen the same tactics as Fed chair Jerome Powell did. It pays no attention to US president's angry talks. All know that ignoring is the oldest method of emotional violence. These 2 countries’ relationship looks more and more often like a family idyll when a husband pretends to be the head of family and makes orders while a wife agrees with him and still does things her way.
Trump’s talks of a total breakup with China look like a man’s desire to divorce:

- Why did you divorce?

- My wife and I didn’t have any common interests except 9 children...

The US-China relations are too tight to be easily broken up. It’s almost impossible to remove Chinese businesses from supply chains which involve the USA. Globalisation rules the world. The US stock indexes’ rally says there won’t be any trade wars. How does S&P 500 know everything? People’s wisdom...Still, people aren’t always wise. Sometimes they aren’t sober.

Pound was hit by a train
The medicine may be more dangerous than the illness. This is not the only problem of the GBP/USD
While the US continues boosting its fiscal stimulus, the UK weighs the risks that the medicine could do more harm than the illness. The UK took second place in the number of deaths from coronavirus. Therefore, the Treasury extended the UK scheme to pay wages of workers on leave because of coronavirus will be extended to late October. According to MUFG, this scheme already costs £49 billion, and its extension will increase the spending by another £30 billion. Taking into account the entire financial stimulus package, the budget deficit, according to the UK government, will increase from £55 billion to £337 billion. At best. At worst, it will be as much as £516 billion. The UK will need to raise taxes, which suggests the GDP recovery will be L-shaped. And this is not the only problem of the pound.

In the first quarter, the UK economy contracted by 5.8%, in the second quarter, according to the BoE forecast, it will drop by another 25%, which will be the worst drop over the past 300 years. The British Retail Consortium reported a 19.1% drop Y-o-Y in total sales in April. This is the biggest fall since it began its monthly index in 1995. According to Financial Times source familiar with the issue, Boris Johnson’s government (likely, under Donald Trump’s pressure) is going to lower tariffs on the imports of the US farm products, which will widen the UK’s current account deficit.

The problems of foreign trade, growth of the UK public debt, UK weak economy discourage the foreign investors from buying the UK securities, which increases the differential in the premiums for put and call options on the sterling to 220 basis points (the average value in 2020 is 150 basis points). This sets the GBP/USD bulls back.
In addition to the problems of the economy, the political environment in the UK is also unfavorable amid the Brexit issues, which haven’t yet been settled. So, the pound’s drop looks natural. Until recently, the sterling was supported by the US stocks, however, the little chance of the V-shaped economic recovery in the USA resulted in the S&P 500 sell-offs, drawing investors’ focus back to the UK domestic problems.

Even the GBP/USD surge after the BoE meeting in May hasn’t increased the number of pound’s buyers. It was more like a” dead cat bounce”, a popular Forex pattern when bulls, being too weak, try to break the downtrend but fail. Yes, only two MPC members out of nine voted for the extension of the UK’s QE by £100 billion, however, Andrew Bailey and Ben Broadbent suggested that the BoE could implement additional easing measures.

Therefore, it will always catch up with you in the end, as the proverb says. In early May, the sterling looked too strong, which allowed the traders, who followed the recommendations to sell the GBP/USD from the levels of 1.235 and 1.229, to make profits. You can join successful Forex traders and boost up your deposit by going short on the pound using the LiteForex convenient services.
Dynamics of the UK GDP

Dollar demands a gift
The Fed’s rate cut below zero could be a real gift for the US economy
Everything has a price to pay. If the Fed claims there are necessary extra tax deductions to decrease the unemployment rate from its potential peak at 20% to 9%-10%, then it could give a gift to the US economy and lower the federal funds rate below zero. President Donald Trump said the US economy deserves such a gift, and the market is more responsive to his comments than to the announcement of the FOMC officials about the harm of negative interest rates.

The cure can really be more harmful than the illness. If the federal funds rate drops below zero, not only investors and banks will suffer, but the entire huge industry of the US money market funds. Nonetheless, not everybody shares this opinion. For example, JP Morgan citing the ECB’s experience believes that a moderate cut of the interest rates into the negative area will yield more positive than harm. The positive resulted from the easing of the financial conditions and lower fragmentation risks in Europe outweighs the negative from the drop in the interbank market activity.

Besides, the U.S. has to fund the costs of the huge volume of Treasuries issuance. The U.S. budget deficit soared to a record of $1.935 trillion in the 12 months through April, and the Treasury is planning to issue $3 trillion in Treasuries in the second quarter and $4.5 trillion in 2019/2020 fiscal year. If buyers pay those debts, it will be a real gift for the U.S. economy. Also, the U.S. dollar will go weaker, as it should be pressed down over the long-term prospect by both the huge debt and the excessively boosted the Fed’s balance sheet.
If Congress is willing to meet the Fed’s claims on the expansion of the fiscal stimulus (House Democrats prepared the plan on an additional $3-trillion aid package), will the central bank be so amendable in response? The strangest thing, to my mind, is Donald Trump’s behavior in this situation. Earlier, he spared no money to draw the US GDP to 3%, without thinking about the consequences, but now he says the states, which do not manage their budgets effectively, should not receive the federal assistance, he also holds back the negotiations. Could it result from the fact that the bill was proposed by the Democrats, not the Republicans?

After all, the talks about potential Fed’s negative interest rates have not been enough to send the US dollar down. The EUR/USD bears have quickly gained back control after Trump ordered the main federal government pension fund, managing about $600 billion, not to invest in the Chinese stocks, based on national security concerns. The US-China trade war hasn’t yet ended, which, together with the concerns about the second wave of the pandemic, weighs on the S&P 500. The crash of the US stock market on May 12 sent the euro down. If the euro goes below the zone of $1.084-1.0845, bulls will have serious problems.
Dynamics of central banks’ balance sheets

Euro is dangerously close to the line
Geopolitics and growing risks of a constitutional crisis weigh on the EUR/USD
If the greenback is strengthening amid the rally of the US stock indexes, how deep could the EUR/USD drop if the S&P 500 trend turns down? The buyers of stocks are not discouraged by the bad news from Germany about s surge in the new cases of coronavirus as the economy was partially reopened, growing pessimism about the recovery of the US GDP, or by a potential escalation of the US-China trade war. Besides, the euro is pressed down by the turmoil in the EU judicial system that might result in a constitutional crisis.

The major growth driver for the S&P 500 is the unwillingness of investors to go against the Fed that is actively stimulating the US economy. They hope that corporate profits will be 13% up in the first quarter of 2021. Besides, analysts suggest a chance that the US stock indexes could rise to all-time highs (JP Morgan, for example, says it will occur in the first half of 2021). Investors are bullish on the sector leaders that, unlike other companies’ stocks, are growing steadily. In fact, the US economic rebound to the pre-crisis pace may be U-, W-, Z- or L-shaped. Investors more often support the idea that the US GDP won’t quickly rebound. It could take months or even years.
One of the drivers of the US stocks sell-off and the growth of the demand for safe-havens, including the US dollar, can be the escalation of the US-China trade war. Washington and Beijing seem to have agreed on the fulfilling obligations under the trade deal signed in January, and China is starting to increase purchases of US soy and pork, reducing Brazilian and Australian imports of these products, but there are distressing talks among investors. Allegedly, China has ended with diplomacy and is switching to the policy of bullying. In response to the charges of the alleged laboratory origin of COVID-19, the Chinese officials point to the elderly coronavirus patients abandoned in France's nursing homes. Also, China’s media spread conspiracy theories suggesting that the USA created the virus to destroy China. China also threatens to block the imports of Australia’s goods as Canberra is going to investigate the virus origins; it also encourages Wellington and Prague for public praise by donating masks and equipment.

Beijing behaves as it did after the 2007-2009 crisis when China was going to outperform the U.S. and Europe. Donald Trump doesn’t like it. He says he is going to halt the further talks with China and should revise the provisions of the phase-one trade deal signed in January.

In addition to the potential sell-offs in the stock market and geopolitical issues, there are disputes between the EU members. Therefore, the EUR/USD is getting more likely to drop below the important support at 1.077-1.0775. After a tough response of the European Court to the German constitutional court, the European Commission could open a legal case against Germany over the violating EU legislation. The situation is alarming. Will the euro stay on the edge of the abyss?
Shapes of the GDP recovery

Will the euro make a fortune at the expense of others?
EUR/USD is above 1.08 being supported by the US stocks
The EUR/USD response to the US jobs report represents the market sentiment. The U.S. stock market rally despite the US horrible domestic data weighs on the US dollar. However, as soon as the euro-area problem becomes acute, the EUR/USD is sliding down. The US unemployment rate rose to 14.7% and employment fell by 20.5 million in April. However, the S&P 500 bull trend didn’t break. The forecasts of the Wall Street Journal suggested a weaker report (16.1% and the loss of 22 million jobs). Many analysts believe that April is the worst month based on the loss of jobs amid the pandemic, and, if the worst time is over, it makes sense to buy the US stocks now.

The US stock market rally supported the growth of most G10 currencies versus the US dollar, but the euro has quickly weakened amid the euro-area problems. A split among the euro-area countries that has started after the governments failed to agree on the corona bonds and increased after the ruling of the German constitutional court is a strong point of the Euroskeptics, which increases the risk of the euro-area breakup. Italy is not like Greece or other small countries within the EU that used to cause trouble in the Eurozone earlier.

The size of the euro-area fiscal and monetary stimulus is much less than that in the USA, which suggests the European GDP will be recovering slower than the US economy, so the EUR/USD uptrend will hardly continue. Yes, the EU finance ministers manage to agree on emergency support of 2% of GDP for each stressed country in the week ended May 10. ESM will provide loans at a negative rate, which, taking into account the fees charged, will be about 0.1%. This means that Italy and the euro area, in general, received the support of about €36 billion and €240 billion, which is far less than the US fiscal stimulus of $3 trillion that could be boosted in late May or early June. The negotiations between the White House and Congress are going on, but the US Treasury Secretary Steven Mnuchin says the states that poorly managed the budgets before the pandemic should not be rescued by the federal government.

Remarkably, the derivatives market doesn’t suggest the EUR/USD will break through the low at 1.063 hit in March. Options traders see that the euro is supported by the US stocks and the factors of the dollar weakness in the long-term prospect, including the excessive growth of the Fed’s balance sheet and the increase in the US budget deficit.

In the meanwhile, the European court has retaliated to the German judges that declared its decision on the legacy of the ECB QE is invalid. The EU court noted that its task is to ensure that the EU legislation is properly applied in all the 27 countries within the currency bloc. It alone has the jurisdiction to determine the legacy of acts taken by the EU institutions. On the one hand, this gave the ECB freedom to act, on the other hand, it encourages the Euroskeptics. The EUR/USD bulls are not strong but they still believe the S&P 500 should allow them to hold the pair above 1.08.
Volumes of option contracts

ECB: who let the judges out?
German Constitutional court’s verdict on QE program looks strange
After Donald Trump afforded to criticize the Fed and speculate about the pros and cons of a weak and a strong dollar, many dream of following his example. Germany’s Supreme Court made another attempt to hog the blanket: it demanded that ECB should justify the appropriateness of its €2.7 trillion QE program launched in 2015. If the ECB fails to do that, the Bundesbank will no longer participate in it. Following Trump, Karlsruhe’s lawyers might have understood life is a dog sled: the landscape is always the same unless you’re the leader.
Dance like no one’s watching, sing like no one’s listening and express your opinion as if you’ve been asked to. The verdict of Germany’s Constitutional Court shocked both ECB investors and plaintiffs themselves. The latter didn’t really believe in the success of their affair after the ECB said the QE program was legitimate. But German judges not only played a dirty trick on the ECB, but also opposed EU principles and norms by overruling the decision of the European Court.

the Executive Board isn’t planning to reply. First, it would undermine the ECB’s independence: they would have to justify every step they make in future if a regional court asked them to. Second, everything has been explained on the ECB’s site already. And can’t they really understand that QE is meant for fighting with the pandemic?

- I can’t be that dumb.

- You underestimate yourself.

According to Christine Lagarde, the current terms are exceptional and they allow the ECB to go beyond the scope of usual instruments. The ECB is an independent establishment accountable to the European Parliament. It will go on doing what it has to do based on its own mandate. The Frenchwoman made the judges in Karlsruhe understand the ECB wasn’t going to react.

Germany’s High Court did recognize that QE wasn’t a direct government financing program. That weakened the euro, but didn’t allow it to collapse. It would have been strange if German judges had spoken of a union between monetary and fiscal policies while the ECB was doing all the dirty work and the German Ministry of Finance was being cheapskate. Money doesn’t disappear into thin air. It just changes its owner.
Anyway, the German verdict stirred up financial markets, as Donald Trump’s verbal interventions did in 2017-2020. The ECB has three months for explaining why its QE program has more benefits than shortcomings. There are so many people eager for ruling. But few are those who strive for work. The Executive Board will keep silent, the European Court is bewildered and the euro got hit in the jaw. How will we work that shit out, dear Europeans? Perhaps, like Donald Trump who declared the USA was about to create a vaccine against Democrats’ electoral victory?