The USD is posting yet another broad-based decline today to end the year on its lows – never a good sign technically! Low-volume markets as year-end nears are probably not the best gauge of where we start 2021 but the greenback has hit lows not seen since April 2018 and all the momentum is for losses to extend further once traders are back to their desks.
The risk-on mood and vaccine-led optimism is killing King Dollar even as the new strain of Covid-19 found in the UK hits the shores of the US. The loss of the US’s interest rate and growth advantages are well-known and good enough longer-term reasons for the bulls to continue struggling in 2021. Similarly, the Fed’s shift in policy to average inflation targeting at this early stage in the recovery cycle means negative real rates, steeper yield curves and ultimately a weaker Dollar.
Meanwhile, global stocks are maintaining their drive north with the MSCI Asia-Pacific index building on record-breaking gains since November to reach an all-time high earlier today. The German Dax is loitering around record highs while US stocks have opened marginally up once again, though they have edged off the new high from yesterday amid dwindling hopes for another US stimulus package.
Gold upside alluring
While vaccine developments have held gold bulls back recently, the consensus weaker Dollar call for 2021 should help their cause if that scenario plays out. Indeed, looking at the futures report which offers a guide to major speculative positioning in the market, there has been a resumption of bets against the Dollar in the last week following a slight reduction in the first few weeks of December. Together with inflation expectations likely outstripping a rise in nominal yields, this should see further upside in gold as real yields soften still further.
Pent-up demand is likely to push up physical demand firmly in 2021 as consumers return to the market. Government stimulus and an increase in disposable income should also provide more liquidity for consumers to increase gold purchases.
Chart wise, bullish momentum has picked up since prices bottomed out at the end of November. If the bulls can take out the December high at $1906, then there is a clear path to the November high around $1965.
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