Senior Trader Update 27/04/2017

Good morning everyone.
 
A choppy day as far as XAU/USD (gold in USD) was concerned with the prices staging a late rally on US dollar and stock market weakness but in XAU/AUD (gold in AUD) after some early price weakness in the Far East, prices staged a textbook channel uptrend on the day (largely an almost 100% inverse correlation to the move in AUD/USD on the day) (charts attached).
 
The release of Australian CPI data during early Far Eastern trading, which came in a touch weaker than expected (+0.5% 1st Quarter and 2.1% year-on-year vs 2.2% expected) put the kybosh on the AUD as the markets inferred that the RBA would be forced to stand pat in relation to interest rates (currently at a record low 1.5%). This would weigh on the Aussie throughout the day and propel XAU/AUD steadily higher by the close of trading.
 
The main driver of XAU/USD overnight was the release of details of US President Trump’s proposed tax reforms.
 
On the personal tax front, the US President is aiming to:
 
·         Collapse the current seven-tier personal tax bracket system into just three tax brackets (35%, 25% & 10%)
·         Double the standard deduction (from 12K to 24K), provide tax relief for families with child and dependent care expenses
·         Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers
·         Protect the home ownership and charitable gift tax deductions
·         Repeal the death tax
·         Repeal the 3.8% Obamacare tax that hits small businesses and investment income
 
On the corporate tax front the President wants to:
 
·         Reduce the corporate rate from 35% to 15%
·         Introduce a territorial tax system to level the playing field for American companies
·         Impose a one-time tax on trillions of dollars held overseas
·         Eliminate tax breaks for special interests
 
The stated aims of these reforms are to; grow the economy and create millions of jobs, simplify the burdensome tax code, provide tax relief to American families (especially the middle class) and lower the business tax rate from one of the highest in the world to one of the lowest.
 
President-elect Trump canvassed all these proposals during the 2016 election campaign but having assumed the reins of power, analysts and investors have serious doubts as to whether any of this will get passed by legislators (particularly when the old plan was expected to increase the Federal budget deficit by $7 trillion over the next decade but the budget reconciliation process requires ten-year revenue neutrality) and additionally that nothing is likely to be passed as regards tax reform until next year.
 
The result was that the US dollar and U.S. Treasury yields retreated and XAU/USD rallied into the close.
 
Geopolitically, tensions remain high on the Korean peninsula. Yesterday, North Korea having conducted a series of live-fire military exercises, saw the US respond by staging a large combined firing drill with the South Korean military. The US also fired an unarmed Minuteman III ICBM from a US Air Force base in California (which was it claimed was ‘scheduled’) to ensure its “effectiveness, readiness and accuracy,” and demonstrate “national nuclear capabilities,”.
A case of “Mine’s bigger than yours”?
 
The US Senate was also given and hour-long briefing by the White House yesterday in relation to the North Korean situation. Following that meeting, a joint statement was released by Secretary of State Tillerson, Secretary of Defence Mattis and Director of National Intelligence Coats which outlined America’s stance in relation to North Korea and included the following:  “North Korea's pursuit of nuclear weapons is an urgent national security threat”, “We are engaging responsible members of the international community to increase pressure on the DPRK in order to convince the regime to de-escalate and return to the path of dialogue. We will maintain our close coordination and cooperation with our allies, especially the Republic of Korea and Japan, as we work together to preserve stability and prosperity in the region. The United States seeks stability and the peaceful denuclearization of the Korean peninsula. We remain open to negotiations towards that goal. However, we remain prepared to defend ourselves and our allies”
 
Elsewhere, market sources report that Swiss gold trading figures (which should be published today) are likely to show a high flow of gold from Switzerland to Hong Kong.
 
Technically, yesterday’s XAU/AUD candlestick could reasonably construed as ‘bullish engulfing’ with a close near the day’s high and a low / high range that reversed two days of bearish price action. If XAU/AUD continues its trek north (higher) then AUD 1710/15 remains significant technical resistance. In USD terms, gold remains within the triangular congestion region and some consolidation within the USD 1245 – 1265 zone remains favoured to provide a better base from which gold bulls might regroup and attempt a fresh assault on the psychologically important USD 1300.00 level eventually (nothwithstanding breaking the MAJOR trendline resistance that commenced in September 2011).
 
Finally, a small correction to yesterday’s commentary. “•  While market consensus is that further US Federal Reserve interest rate increases are probable this year, with the rest of the world’s central banks reportedly printing 200 billion a day in aggregate” should have read “200 billion a MONTH in aggregate”. Apologies for the oversight.
 
Good luck
 
Regards,
Andre