Prathamesh Mallya
The dollar index's 5 percent fall in July 2020 was its largest monthly fall in more than a decade. While the fall in the US real yields has been the key factor behind the fall in the dollar as a currency, the fact that the European lawmakers have taken major steps, shoring up their respective unions are the testimony to the fact that euro has been the favourite of fund managers as seen in the CFTC positions chart alongside.
The sentiment in the Euro Area has been more optimistic when compared to the US. Net longs in the EUR/USD pair as on July 28, 2020, stood at around 1,57,559 contracts, which is similar to the 2018 highs.
It needs a big boost from the US to bring the optimism back into the economy as the pandemic has really slowed down and contracted the growth. However, the situation reminds us of the fact that history repeats itself and if euro were to fall from here, it might result in a stronger dollar. Also, dollar and precious metals share inverse co-relation.
Both the precious metals are already heated up very fast and in a very short time frame, gold and silver have rallied by around 34 percent and 100 percent from March lows. The change in the direction of dollar will have implications to both the metals and the near term correction in these metals cannot be ruled out.
While the major trend and momentum remain strong, the fall in the metals might be steeper than markets anticipate. Lets hope, this fall will give those investors a chance who missed the mighty rally and most important, the physical buyers of the metal will have some hopes of buying these precious metals with the price correction.
The author is AVP Research - Non Agri Commodities and Currencies at Angel Broking.
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