Fed Rate Rise This Week – Repeat of Last Year?

After months of speculation and growing expectations, this week is the week of the, now, almost certain US Fed rate rise.  In a repeat of this time last year gold has been under pressure in the lead up to it, with big falls on Friday night and closing down 1% for the week.  

There other similarities to last year too.  On the COMEX futures exchange, from Saturday’s Commitment of Traders (COT) report we are seeing the speculative Managed Money traders’ net positions drop to their lowest since January this year, before gold’s big rally started.  Long positions dropped for a fourth straight week and this week shorts increased as well.  Whilst still net long (banking on a rise), it is the lowest since January and the Commercial’s on the other side of the trade are at their lowest net short position since January too.  It is a contrarian’s dream set up.

The difference to last year is that gold has been arguably more oversold given the mid year highs it has come off and shares are more overbought with the Shiller CAPE PE Ratio for the S&P500 up at a nose bleed 27.7 with only the 1929 Black Tuesday and all time champ Dot.com bubble going higher.  The other key issue is the USD rally which has the Managed Money long in a very big way, again its highest net position since January but in a more overbought manner.  We also have the background of sharply rising bond yields courtesy of the post-Trump bond sell off.

What this latter point might mean is that the market itself has delivered higher interest rates before the Fed even got to it.  Very different to last year.  The accompanying higher USD is already hurting the US trade balance and economic growth (as we discussed in last week’s Weekly Wrap).  So whilst the Fed could not possibly avoid the hike this Wednesday with any semblance of credibility, they may deliver it with very dovish statements to try and counter this destructive rising USD.  That could well deliver a significant counter trade that could see the USD drop and gold rise.  There is always the ‘buy the rumour, sell the fact’ outcome as well.  Last year we had to wait for January for markets to realise the ramifications of a Fed tightening amid record US debt, weak fundamentals and simply massive Emerging Market USD denominated debt.  That may not necessarily be the case this year.