FxWirePro: A run through on Gold vols and price dynamics

The global risk appeared buoyant as S&P 500 and Nasdaq marked record highs on the back of favorable earnings from Twitter, Hasbro, and Lockheed Martin. The USD and crude oil prices also climbed and the UST yield curve bull steepened with the 10-year bond yield at 2.57%.

Amid relatively stronger data out of the US, 10-year yields rose 8bp last week, retracing back to levels printed just following the March FOMC meeting, as part of a bearish steepening of the curve. US 10-year real yields also rose more than 5bp, but gold prices remained relatively firm despite the negative price drivers, rebounding strongly the only time they tested below $1,285/oz. 

In total, despite the move higher in yields, gold ended last Thursday at around $1,275.49/oz, within a dollar of where it started the week, before drifting in sideways in early trading this morning. 

After last week’s move higher in nominal yields, 10-year Treasuries no longer look as stretched as they did the week prior—the residual vs a fair value model halved to 15bp too low last week—with gold so far escaping some of the immediate fundamental downsides we were flagging last week. Yet at the same time, while gold held firm against negative rates catalysts last week, other drivers don’t necessarily look poised to push prices higher in the very near term. 

Among FX, we could foresee the recent macro data heralding more range-trading in G10 FX rather than a turn lower in USD as the bar for a USD sell-off is quite high given 1) US rate expectations have furthest to back up if growth does rebound, and 2) there are no positive local currency stories in G10 bar NOK.

Elsewhere, despite equity markets moving to fresh year-to-date highs, our global equity strategists remain constructive, seeing the current market backdrop as very similar to the 2015/16 mid-cycle correction episode, rather than the end of the cycle. This could, in theory, begin to increasingly erode any built-up “safe haven” gold demand. To this end, despite a reduction of more than 38,000 contracts last week, net non-commercial positioning on Comex still stands just below 100,000 contracts long. 

Gold vols: With the wages prints (US jobs report) came in softer in the recent past, gold realized vol should remain contained. Returns on gold vol trading have been mediocre and quick to reverse in recent weeks. The gamma trading model continues to indicate gold gamma to be a sell but at a lower conviction. Front-end spot-vol correlation underperformance weighed on risk reversals, which are back to nominal levels. 

Meanwhile, the back-end riskies continue to look rich vs. the ATM vols, moving the needle in the direction of long expiry call spreads. 1Y ATMF/25D XAUUSD call spread shows 3.8X max payout to cost ratio and comes at 41% discount to outright vanilla. Notably, 3M silver vol is 2 sigma cheap (1yr basis) though the 1vol rolldown is putting further downside pressure. We are watching it as an RV vs gold for more favorable net vol carry entry levels. 

Currency Strength Index: FxWirePro's hourly EUR is at -106 (highly bearish), hourly USD spot index is flashing 86 (which is bullish), at press time 14:02 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex