Asian shares are extending their losses today from the 2021 low set a day earlier, while King Dollar is holding onto its recent gains, sitting on its throne at nine-month highs. Chinese markets are leading the declines with the prospect of the US Federal Reserve cutting back its bond purchases spooking many investors. European bourses have opened mixed.

The gradual possible reduction of monetary stimulus has had traders in thrall for months and the realisation that the punchbowl that kept on giving is being taken away, little by little, is problematic for markets that have only gone in one direction for so long. The Delta variant spread and the Chinese economic slowdown, coupled with its government’s regulatory crackdown are only adding to investor woes.

Seasonality pointed to more volatility

Historical research shows that stock markets have a tendency to underperform through the middle part of the year. (“Sell in May” and all…) In turn, volatility tends to increase which means safe haven currencies are likely to outperform. The VIX, “Wall Street’s fear gauge”, is expected to see the largest monthly rise of the year in August and remain elevated through to Autumn.

Although volatility has only really spiked on a couple of occasions so far over the last few months, the widely watched volatility barometer is on track for its biggest weekly surge since January. And right on cue, since the more hawkish June FOMC meeting, the FX space has seen outperformance in JPY, CHF and USD. Meanwhile the top performing major in the first half of the year, CAD, has weakened 3% with AUD and NZD adding to their early year losses. History does repeat itself, in some form, it seems!

Gold steady in the face of the rampant buck

Although many other commodities have been grabbing the headlines this week with iron ore collapsing and copper falling to its 200-day moving average, the ultimate precious metal has been holding its gains even as the US dollar charges higher. Gold has traded in a very narrow range all week, which is unsurprising in some ways after the fireworks of the flash crash last week and the subsequent sharp rebound.

A significant bottom is often put in after such price action so $1,676 is major support. A breakout of either the top ($1,792) or bottom ($1,770) of this week’s recent range will determine direction in the near term. Bulls have their eyes on the psychological $1,800 level and then multiple tops around $1,830. A move to the downside sees the June low at $1,750 act as first support.

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