The correlation between the Japanese Yen and gold prices has reemerged, with a stronger yen potentially benefiting the yellow metal, according to Market Analyst Konstantin Oldenburger at CMC Markets.
Oldenburger noted that last Thursday, the Bank of Japan might have intervened in the currency market to support the weakened yen. He suggested that such interventions could become more feasible if the Federal Reserve adjusts its monetary policy.
He explained that U.S. equities generally perform well during periods of rising or high interest rates due to increased liquidity in the USD. However, when interest rates decrease, this liquidity tends to flow out of the dollar and into alternative investments globally. The yen could gain from this shift in investment flows.
Following the release of the U.S. Consumer Price Index (CPI) for June last Thursday, the USD/JPY exchange rate fell by more than 2%, amid speculation of intervention by Japan’s Ministry of Finance.
“If the trends from last week—driven by lower CPI and anticipated Fed rate cuts—persist, the yen might rise alongside gold prices towards historic highs,” Oldenburger stated.
He also highlighted that hedge funds currently hold minimal long positions in yen and predominantly short positions, which could be squeezed if the yen continues to strengthen. Historically, a strong yen has been positively correlated with gold, suggesting that gold prices could also benefit from this trend.
Gold has been trading within the range of $2,431 to $2,290 per ounce over the past three months. Oldenburger observed that attempts to break above this range since early July could push prices towards $2,700. Conversely, if gold falls below $2,290, it might correct further to $2,220 and $2,189.
