When FOMO Turns to Foe-MO

Gold and silver slide

The buy-everything FOMO herd finally experienced some emotional two-way price action overnight, as both gold and silver delivered a harsh lesson on the perils of short-term momentum trading. Gold collapsed by nearly 6.0% to USD1912.00 an ounce, and silver fell 15.0% to USD25.30 an ounce.

The culprit was a rise in US yields after a higher than expected US PPI, and ahead of an avalanche of bond issuance by the US Treasury shortly. Combined in a toxic mix with a mountain of fast money long positioning initiated above USD2000.00 an ounce, the harsh lesson of running with the herd was laid bare. That is, while the entrance door would not look out of place at a Boeing factory hangar, the emergency exit door is tiny and poorly marked. When thousands of headless chickens try to leave at once, feathers will fly.

That is not to say that the great US dollar rotation is at an end, or that the biblical migration of the wildebeests that we know as the global equity market rally is complete. Far from it, in fact. The world’s central banks are still easing from here to eternity, monetary debasement continues apace, and the world’s liquidity glut continues its quest for yield in a zero percent world.

The risks are rising though, that a material correction to the buy-everything rally is closer than we think. The critical ingredient could be the temporary rise in US yields. A correction, if it comes, is likely to be vicious, but short in duration. In the medium to longer-term, though, investors probably have little to fear. No matter how stubborn Covid-19 turns out to be to eliminate, the world’s central banks’ will have our back. We are going to need a good dose of inflation in the mid-2020s to get out of the whole mess, though.

In Asia today, attention will likely be focused down under, way down under. The Reserve Bank of New Zealand has announced its latest rate decision, leaving rates unchanged at 0.25%, but markedly increasing its QE target to NZD 100 billion. The return of Covid-19 community infection to New Zealand, after 102 days of freedom, gives today’s announcement added poignancy.

The RBNZ has stated there will be no more rate cuts until 2021 but will add more stimulus as needed. It has also made passing remarks on the New Zealand dollar rate. The New Zealand dollar has looked quite vulnerable from a technical perspective in recent days. With the RBNZ letting doves fly, the Kiwi could be in for a tough day, especially given developments from yesterday.

Malaysia’s GDP at midday today may give the markets some food for thought. The YoY number is expected to show a fall 10%, but an outperformance could see the USD/MYR fall back to its recent lows around 4.1800.

The United Kingdom releases a swath of tier-1 data this afternoon, including GDP, the trade balance, Industrial and Manufacturing Production. The British pound has failed badly across multiple days ahead of 1.3200 recently. Disappointing data could see GBP/USD fall through 1.3000 support and set up a material correction lower to the recent rally.

After last night’s PPI data, today’s US CPI will be closely monitored. The YoY headline is expected to come in at 1.10%. A higher reading is likely to see US yields move higher though. Given how nervous markets were about the rise last night, admittedly because the street is so heavily positioned the other way, it has the potential to spark more US dollar gains, and possibly further retreats by equity markets and precious metals.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst - Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia and the New York Times. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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