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The yellow metal price would usually be sensitive to moves in both UST rates and USD. The gold prices would be more expensive for holders of foreign currency on robustness of dollar, while a rise in U.S. rates lifts the opportunity cost of holding non-yielding assets such as bullion.
The US dollar continued to recover yesterday. The softness in currency is being supported above all by the monetary policy outlook, i.e. the hope of a more rapid normalisation of US interest rates on the part of the Fed due to a quick rise in inflation. Powell is scheduled to testify on the Semi-annual Monetary Policy Report before the Senate Banking Committee, in Washington.
Good ownership in front end Gold skews: With Gold front vols bound to remain firm for longer and as the late cycle Gold rally takes hold on the back of the late Fed, Gold skews should stay supported even as 3M skews are at the highest level since Aug 2017. Positively skewed IVs of 2m tenor have been well balanced that signify the hedging sentiments on either side.
Returns from delta-hedged 25 delta riskies (refer above chart) have held well as skew pricing remained within range and despite an aggressive 2017 global vol sell-off.
While the Italian election may turn out to be materially more muted than last year’s French election 1st round which pushed 3M XAUUSD skews to the highs of 2.7 vols, at about 1.2 vol of positive static carry on 3M-1M segment 3M XAUUSD 25D riskies provide an attractive positive static carry risk-off hedge.
We recommend buying delta-hedged 3M XAUUSD 25-delta risk reversals @ 1.3/1.6 vol.
Currency Strength Index: FxWirePro’s hourly USD spot index has shown 48 (which is bullish ahead of US unemployment claims and Fed chief Powell’s testimony) while articulating (at 12:06 GMT), for more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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