Thursday, March 6, 2014

Forex volatility on Non Farm Payroll day | Gold and the situation in the Ukraine

Today is Non Farm Payrolls day in the USA. This report is released, typically, on the first Friday of every month. It is a closely watched event, as employment is one of the foremost criteria for the determination of monetary policy, in most jurisdictions.

The NFP report for February, which is scheduled for release at 1:30 PM GMT today (13:30 Hrs) will be more closely watched than usual, as the last two such reports have been poor. This has given rise to the possibility that the US economy might not be recovering as expected, which in turn has potential implications for the end of Quantitative Easing (QE) and therefore the strength or otherwise of the US dollar.

We will be staying out of the market today because the critical nature of the NFP report often gives rise to severe bi-directional volatility in the Forex market. For example, the chart above shows that the rate for Cable, the British pound against the US dollar (GBPUSD) moved a full cent from top to bottom in the two hours after the release of the Non Farm Payroll report last December, before coming back to rest more or less where it started.

Later, we will assess the outcome and, more importantly, the reaction of the market to said outcome.

Gold and the Ukraine

As regular readers will know, we have been bearish on gold, which means that we have been expecting it to reduce in price. It has failed to do so. At the start of the business yesterday it looked like it was well and truly on the turn, and we said so.

However, also yesterday, sanctions against Russia were mooted by both the EU and the USA as a response to the situation in the Ukraine and Crimea. The Russian ambassador to Ireland was quoted as saying that Russia was not afraid of sanctions and that they were, in any event, a “double edged sword”, and so would have consequences also for the nations that chose to impose them.

Then the market discovered, as did we, that Russia was the largest producer of Palladium, a rare and precious metal that is the main component of catalytic converters. There is one of these in every modern motor vehicle on the planet.

The price of Palladium surged, which caused gold to rise in sympathy, as another precious metal. Gold is bought anyway in times of geopolitical tension, as it is perceived by many to be a safer investment than currencies in these situations.

So it looks like we must wait a bit longer for the expected decline of the yellow metal.

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