FxWirePro: Under-pricing and unbiased hedging weigh on bullion markets despite hawkish Fed's stance

Bullish neutral risk reversals are observed in gold’s OTC hedging market, while positively skewed IVs of XAUUSD have been stretched out on either side. This is interpreted as the hedgers bid for both OTM calls and OTM put options.

Well, so far in this year, Gold price has struggled amidst the market’s hawkish reconsideration of Fed policy as to how robust the growth and low unemployment have been, and the product of this policy amidst growth letting up in the rest of the world – a rallying dollar. A rising US yield curve has also been a dominant issue affecting markets this year.

The intent is foreseen from the Fed to deviate from its steady rate-hiking path and believe the Fed will hike 6 more times by the end of 2019 (two more hikes this year and four next), and expect the yield curve to rise and flatten at the same time, eventually inverting sometime after 1H’2019 (Treasuries: We now return to your regularly scheduled programming, Barry et al., 14 September 2018) (refer 1stchart). Fed policy makers see fewer hikes, similarly projecting two more rate increases for the remainder of this year, but only three increases in 2019, which will then put the rate at a level where officials see policy as neither stimulating nor restraining the economy.

The futures markets, however, continue to under-price to both our and Fed’s forecasts, implying 44bp worth of hikes for the rest of 2018 but only 2 hikes in 2019, leaving plenty of room for another round or two of repricing.

Nevertheless, the market has been catching up and OIS markets are pricing in 62% of our Fed forecast through September 2019, up from just 47% a week ago (refer 2ndchart). Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -76 levels (which is bearish), while hourly USD spot index was at 114 (bullish) while articulating (at 12:29 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex