US dollar perky after CPI but gold rallies in sign of bets on a patient Fed
When analysts talk about 'the market', there is the assumption that participants in various markets have the same expectations.
Interest rate derivatives are the easiest to read and current Fed funds futures imply a 48% chance of a rate hike. We tend to transpose that across markets and assume that's what's priced into the dollar, stocks and other assets.
In general, it works but it's not always true. Different types of people gravitate to different markets and there's no way to measure and arbitrage out those differences.
Gold is probably the best example. Gold bugs are a species of their own and although they're more of an endangered species than they used to be, the market still attracts a different kind of trade.
Right now, there are three big reasons to be long gold:
- Worries about FX devaluation
- Speculation the Fed won't hike
- A better technical picture
The only part of that equation that might have changed today was the Fed story. In the FX market, general dollar demand has been enough to overwhelm any US dollar selling on slightly lower inflation. But gold is showing a mind of its own and threatening last week's high of $1126.
For me, it's the latest in a series of better signals from gold. I expect a test of $1141 in the coming days if/when US economic data continues to disappoint.