USD weaker, Gold shines again, Oil flaming out


As 2022 approaches, markets seem poised to move into a new phase.

But it is now about the mid-term elections in the US. It is becoming clear that equity markets are riding on the possibility of a divided government. At face value, this may seem counterintuitive to non-market people, but to those watching the red flashing headlines on a computer screen, quite clearly, gridlock means nothing can be done at the political level. But importantly, at this point, there will be no opportunity for left-field fiscal policy inputs, which is flat-out beneficial because it reduces Fed policy uncertainty.

All sorts of positive historical returns are unfolding when such an outcome occurs, but what will be interesting to see is against the backdrop of restrictive monetary policy settings.

I reiterate; However, the less hawkish tone echoed by central banks over the past few weeks is part of the peak rate process, and is the next phase for markets.

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A split Congress reduces the likelihood of expansionary fiscal policy feeding Fed rate expectations. Lower rates volume should carry over into declining equity and FX volume benefiting growth equities, driving a weaker USD. Midterm-based dollar weakness will also stimulate long-term gold and industrial metals trading.

With the price of a peak Fed, the story is moving towards reducing saturated USD dollar longs from US yields and a USD higher playbook.

One point of interest in the US fixed-income space is that APAC has flagged numerous block sales in USTs during the hours. The common wisdom is that these could be foreign central banks selling Treasury holdings to fund FX interventions. This is supported in part by the apparent lack of interest in recent UST auctions from indirect bidders – proxies for foreign monetary authorities or central banks – and further supported by data from Tokyo showing foreign securities holdings fell by $43.9 billion. In October, when $42.9 billion was spent in support of the yen.

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The rolling lockdown in China, as Covid cases rebound, is catching oil traders leaning the wrong way. Last week oil traders were plunging into a trade that no one owned, long oil on China’s early reopening. With that narrative pushed back, with a significant build on US inventory data implying a slowdown in US demand, bearish crews are back in full force this morning in Asia.


Gold has broken through most of the technical levels that used to keep it in check. I suspect that CTA and Fast Money are classifying short positions not only in precious metals but also in G10 currencies.

As the ‘Peak Fed’ theme approaches and the terminal rate converges around 5.0%, the USD bullish momentum has broken positively for gold.

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A high interest rate environment is not traditionally positive for commodities like gold, but as peak rates drive US dollar weakness, gold is starting to shine brighter.


A liquidity crunch on crypto exchange FTX, which resulted in a bailout by Binance, negatively impacted traditional financial markets, although US equities closed higher on the day. Bitcoin is up nearly 8% from the lows after a 17% drop in the previous 24 hours; FTT, the exchange token of FTX, is down 75% in the last 24 hours. The extent to which these tokens were used as collateral for taking out loans will help determine the fallout in the broader crypto space in the coming days.

So far, liquidation chasers have held up to 18,000, but the daisy chain effect will take a few more days to play out.


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