Since the beginning of April, the dollar’s continued weakening seems to be moving beyond monthly or quarterly rebalancing. US equity indices are rewriting all-time highs, and emerging market currencies are rising at an accelerated pace. These are all clear demonstrations of the recovery in demand for risky assets.
Markets are paying more attention to the recovery of activity in North America and several countries in Europe, where easing of restrictions and recovery of demand for commodities and energy are looming.
Although the world’s third wave of coronavirus is already comparable to the second one by new daily cases, with India, Brazil, Turkey and several other major emerging economies taking the brunt of it, it remains outside the focus of markets, pushing commodity prices higher.
And throughout this week, this demand was actively manifested in investor interest in oil and gold.
WTI crude oil is trading at $63.77 at the start of trading in Europe. Its price since the second half of March was hovering in the range of $57-62. This week it managed to break its upper boundary. The report on US oil inventories was a growth driver, noting the reduction in inventories to last week’s level and the level of exactly one year ago. This was further evidence of a return to normalcy in the oil market, which triggered a 4% jump in prices and has supported buying since then.
The next milestone on the upside is seen in the $66-67 area, where the price reversed to a correction in March. Having broken out of the $60-65 range, Brent can retest the $70 resistance in the following few trading sessions.
A weakening dollar dramatically increases the chances that the buyers will not stop there. The March pullback allowed liquidity to build up and recharge the bulls for an assault into the $68-77 area for WTI and $70-85 area for Brent.
Gold also received support from buyers after an 8-month slide to the long-term trend line of support and a 38.2% retracement line from the rally since 2018. This trend has persisted and oversold gold is enjoying buying on the downside. It is also helped by a weak dollar and lower long-term Treasuries yields, making gold more attractive as a hedge against inflation.
The latest growth momentum has brought gold back above the 50-day average. It has lifted the price by $90 since the beginning of April to $1762, but it has yet to prove long-term growth by passing the test of the 200-day average (now at $1857).
If we look at the pullback from August 2020 to April as a correction from the growth impulse from August 2018, the next big step for the long-term buyers could be as high as above $2600.
