Gold, silver and other metals have gained more against the US dollar than other currencies such as Euro, sterling, loonie due to the slide of the greenback against most of the currencies across of the globe in 2007. If the US dollar continues its slide in May, then it could last into first week of June. After the first week of June, markets will focus their attention to the Fed meeting. If the US economy shows signs of renewed growth and inflation rises, then there is slight possibility of an interest rate rise against the current market view of an interest rate cut. Any slight hints that the Fed could raise interest rates in June meeting will tilt the scales back in favour of the US dollar.The current movement of the US dollar reminds me of 2003 June Fed meeting wherein markets were expecting the Fed to cut interest rates by 50 bps but the Fed cut interest rates by 25 bps and the US dollar gained sharply thereafter. If history repeats itself then the US dollar should gain sharply after the June Fed meeting. Till then the bearish tone will continue for the US dollar.
Eurozone and other country central bank chiefs are not complaining about a stronger currency. Like the Indian central bank, others are using the currency gains to control inflation which will help them not to raise interest rates in future. However the difference is between full convertibility and partial convertibility. Incase of fully convertible currency such as euro, the central bank intervenes once in a blue moon, whereas in case of partial convertible currencies such as the Indian rupee, the sword of central bank intervention hangs.The Indian rupee has gained more than five percent over the past two months. The reserve bank of India (RBI) which regularly intervenes to check rupee gains suddenly one fine day runs out of options to control inflation and lets the rupee gain to check inflation. Indian exporters particularly small and medium sized exporters which use highly labour intensive techniques are getting the hit due to sharp gains in the rupee. Indian small scale exporters have competition from China wherein profit margins are extremely thin.Since rupee has never gained so much in history, these exporters had most of their receivables unhedged. Indian central bank (RBI) either should continue to intervene to check rupee gains or never intervene and make the rupee fully convertible which at the moment seems highly unlikely. Till then the Indian exporters are going to suffer. As far as precious metals are concerned, a stronger rupee nullifies the rise in price to a certain extent which will result in greater demand at lower levels. Indian hedgers are having a windfall as they continue to sell comex future and buy mcx future in gold, silver, copper and crude.
Gold and silver are going to remain firm as the US dollar trades with a softer bias and global equity markets rise on merger and acquisitions related news. Any change in the direction of either of the two will adversely affect prices.
GOLD -- JUNE FUTURE
Gold needs to break $696 - $701 zone for $715 and $730. On the lower side $680.60 and $675.10 are the support levels.
SILVER -- JULYFUTURE
Silver needs to hold $1367 to prevent further losses to $1349 and $1315. On the higher side $1420 and $1434 are the resistances.
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