This week, the FX market was abuzz with the sudden appreciation of gold and its spillover effects on other currencies. On Thursday, gold suffered one of its largest record daily drops in modern times, with a fall of over 10% in percentage terms. This led to a corresponding drop in the value of metal-oriented FX, such as the ZAR and CLP, against the USD.

The common narrative points to the nomination of Kevin Warsh as the next Fed Chair as the cause of gold’s sudden appreciation, but signs of metal fatigue had already started to emerge on Thursday. Warsh’s comments suggesting that the Fed could lower rates a lot may have contributed to the slight easing in USD OIS by year-end, but his belief that the Fed’s balance sheet should shrink runs the risk of keeping longer-term Treasury yields higher, which goes against the administration’s preference.

The large-scale capitulation in precious metals and concurrent USD strength may have caused some unease in the market, but equity and bond market volatility remains low. If this changes, it could lead to further USD strength. The DXY’s weighted rate differential suggests that this USD measure could be closer to 99 rather than 97 at the time of writing.

In addition to gold’s appreciation, central banks have been busy this week with the RBA (Tuesday) and the ECB (Thursday) both meeting to set monetary policy. The RBA left interest rates unchanged, as expected, while the ECB announced a new longer-term refinancing operation to provide liquidity support to banks.