FxWirePro: A Run Through on Commodity Trade Perspectives Amid Geopolitical Tensions

There was also a flight to safety into gold from the US-Iran tensions in the Persian Gulf. Gold closed above $1300 by the end-May and surged to USD1400 this morning. While Brent crude oil prices have, in less than two weeks, increased to USD65/bbl from its USD60 low on June 12. 

The attack on oil tankers and a US spy drone occurred in the Strait of Hormuz where much of the world’s oil supply passes through. The last thing the weak world economy needs now is an oil shock adding to global trade tensions. The concern is best reflected by the renewed its safe-haven status of the Japanese yen which posted its strongest close since April 2018. 

While apart from Fed cut expectations, the US dollar index (DXY) has been weighed by excessive optimism over the Xi-Trump meeting at the G20 Summit on June 28-29. China has no desire for another trade truce like the one struck at the previous G20 Summit in Bueno Aires. China requires consultations to be based on mutual respect, equality, mutual benefit and in good faith to achieve an agreement that does not sacrifice its right to development or undermine its sovereignty. 

OTC Updates for Bullion Market:       

Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks. One could see a bullish risk reversal setup. To substantiate the above bullish sentiment, risk reversal (RRs) numbers indicate an overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in the future.

Options Strategy: Capitalizing on the prevailing dips of gold price in the short-run and OTC indications, bullish neutral risk reversals of gold, we advocate longs in gold via ITM call options.

Buy 3m XAUUSD ATM -0.69 delta calls on hedging grounds. If the expiry is not near, delta movement wouldn’t be 1 point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying. 

Alternatively, on hedging grounds, we advocated long positions in CME gold contracts. We now like to uphold the same strategy by rolling over the contracts for July’19 delivery as we could foresee more upside risks. Courtesy: DBS

Currency Strength Index: FxWirePro's hourly USD spot index was at -154 (highly bearish) while articulating (at 10:29 GMT).

For more details on the index, please refer below weblink:

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