Markets Rattled By Higher Volatility But Wait, There is More

The sentiment in the markets is generally adverse today. The current risk factor has a wide spectrum ranging from North Korea escalating the geopolitical uncertainty, US and Russian relationship at their new low, the scary outcome of French Election and the ongoing war in Syria. These prominent elements are supporting the gold price. We mentioned last week that the rally in shining metal could easily touch and break the level of $1300 easily and we are still maintaining this target.

Traders are more focused towards hedging their positions, than anything else. If you look at the VIX index, the recent spike tells you one, and one thing only; investors are taking advantage of cheap volatility index to hedge their risk.

Many in the market are focused on the dollar weakness which was hit hard after Trump’s comments. Trump did criticise the Fed previously for their monetary policy and the market was thinking that he would replace Janet Yellen when her term will expire. However, last night, he has changed his stance and pretty much gave his blessings to Janet Yellen. Trump wants to keep the interest rate lower, this would aid in gaining some competitive edge in trade relations with other countries. Finally, Trump’s mammoth infrastructure plan would be fueled by debt and lower interest rates would be an ideal situation.

Despite this, we think that the path of least resistance for the dollar remains skewed towards the upside rather than the downside. The US labour market is strong, inflation is picking up and the size of the Fed balance sheet is massive. The Fed is utilising the correct strategy in bringing the interest rate back to normal as long as the economic data is not hiding something from them. Thus, the current pullback in the dollar could be an opportunity to get back in if you have missed the original opportunity. The short term support is at 97 for the dollar index and the resistance is at the 103 mark.

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