Gold – Euro Spread Unwinding Fuels EUR USD Breakout Rally

The new calm that is working its way through theEuro Zone may have triggered a huge drop in the gold market and the subsequentrally in the Euro.

The new calm that is working its way through the Euro Zonemay have triggered a huge drop in the gold market and the subsequent rally inthe Euro. Traders are saying this move was triggered by the unwinding ofEuro-Gold spread trades which were placed when traders bought gold in Eurosduring the currency crisis. Traders are now taking profits on this trade orcutting losses now that the Euro has begun to rise. If gold continues to selloff then look for spread unwinding to continue to underpin the Euro.

The EUR USD posted a strong gain on Thursday triggered bythe announcement by Spainthat it had sold out $4.3 billion of five-year bonds. The news is evidence thatappetite for government debt is still strong and that perhaps the fear of holdingEuropean sovereign debt risk may be abating.

Spainhad to pay a higher premium to complete this auction, but it was able to placeall of its allotment. This news along with the fact that bids exceeded supplyby 1.7 times was viewed as a relief for Euro investors especially since Moody’scredit rating service placed Spain’s credit rating under review for a possibledowngrade.

The ensuing short-covering rally in the Euro after the goodnews from Spainhelped drive the market through the last two main tops on the daily chart at1.2397 and 1.2467. Now that these two barriers have been taken out then itshould be “off to the races” as the move through this two levels also took outa pair of downtrending Gann angles which had acted as resistance since April.

The charts indicate that upside momentum may be strongenough to trigger a huge short-covering rally. Further analysis shows that amajor 50%/61.8% price cluster at 1.2782 is the most likely major upside target.

Closing price reversal bottoms in the commodity-linkedAustralian and New Zealand Dollars could be indicating that traders are gettingready to put risk back on the table. Bearish traders in these two markets pointout that today’s rallies had nothing to do with risk but rather with technicalbuying after downside objectives were reached following sharp sell-offs.Furthermore, traders note that short-sellers were encouraged to buy backpositions ahead of Friday’s U.S. Non-Farm Payrolls Report.