Friday, June 19, 2009

Inflation trade faces critical technical test

As I write this on Friday morning, the gold price is at $934.50 and is testing the uptrend that began in October 2008. Prices are also hovering near the 23.6% Fibonacci retracement level.

For technicians this represents an important test for gold.

The Rand carry trade
South African has long been viewed as a commodity producer, mainly gold. The South African Rand has been thought of by FX traders as a commodity play currency, much like the AUD or CAD.

The ten-year benchmark South African bond is yielding 8.83%, considerably above the US ten-year at 3.83%, for a spread of 500 bps. Just for kicks, I looked at the cumulative P&L of this carry trade. As the chart below shows, this trade is also approaching a technical overhead resistance zone.

Which way any of these break, I have no idea. But it’s important to monitor these charts as they indicate a critical test for inflationary expectations.

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