Stay short gold
(Peter Rosenstreich, head of market strategy)
From a fundamental and technical perspective gold continues to look like a short. Steady selling price pressure from September $1350 levels should persist as gold sensitivity to political event risks has lessened significantly. In fact, there was almost no reaction from the precious metal to the Italian constitutional referendum. Since the narrative of 2017 is political risk, gold is uncharacteristically without a driver. With the Fed becoming more hawkish in the past weeks and global economic data suggesting that the international growth and ‘reflation’ story is gaining momentum, macro conditions should provide further headwind for gold bulls. In addition, the void expected when monetary policy hits the exhaustion point is now being filled by expansionary fiscal policy. Hence, the volatile market reaction we had anticipated earlier seems less likely. The era of loose monetary policy conditions coming to an end will limit gold demand. With global interest rate yields trending higher the growing cost of carry will further convince speculators to rotate from gold into fixed income investments. We remain bearish on gold, expecting an extension of bearish trends to $1111 January 2016 low ($1165 should cap recovery bounce).
Yellen to speak in Baltimore
(Arnaud Masset, market analyst)
After reaching 103.53 last Thursday, the US dollar continued to lose ground against most currencies. The correction was especially acute against the Japanese yen and emerging market currencies as market participants realised that the USD rally is most likely done. The greenback fell as much as 0.80% against the JPY with USD/JPY testing the 117 support level before stabilising at around 117.30. The Russian ruble also found some buying interest on Monday as USD/RUB fell 0.50% to 61.7590. The recent pick-up in crude oil prices following the OPEC output cut deal gave a positive boost to the Russian currency. Moreover, the improving outlook for US-Russia relations will likely renew investor appetite for Russian assets should oil prices remain around the $50 threshold. The Norwegian krone was also better bid against the USD amid further oil strength. USD/NOK erased Friday’s losses and returned to 6.6385 as the Brent crude price rose 0.80% to $55.65 a barrel.
Janet Yellen will speak on the state of the job market at the University of Baltimore this evening (GMT 18:30). However, we do not expect the Fed Chair to make sensational declarations, especially in light of the recent dollar gains. Indeed, further dollar strength would definitely not be a good thing for the US economy and would dampen exports and jeopardise reflation. US treasury yields continue their downward adjustment with 2-year yields sliding to 1.24%, while 5-year yields are heading towards the 2% threshold. We believe that there is room for USD depreciation as it will be seen as a healthy correction.
BoJ to remain on hold
(Yann Quelenn, market analyst)
The Bank of Japan will decide on its monetary policy this Wednesday and we expect the main policy rate to remain unchanged at -0.10%. We believe that the current dollar appreciation is providing some relief to Japanese policymakers.
However, there are still some concerns such as the 10-year government bond which is yielding close to 0.1% - the highest level of the year. This indicates that the yen may finally strengthen again if 10Y yields push even higher. This is likely to push the BoJ to increase the purchase of bonds of which are already scarce, which would definitely be a growing concern in the medium term.
For the time being, the yen continues its fall and stronger oil prices are increasing downside pressures on the currency, which is a good news for the country's inflation target of 2%.
Finally, if US rates continue to move higher, we believe that it would cause an increase of the 10-year Japanese bond target of 0%. Nevertheless, in our view, the US rate path is largely overestimated by markets and consequently the Japanese yen should strengthen in the medium term because of the disappointment caused by the Fed. Indeed, the Fed has been overestimating the US normalization path for quite some time.
For further comments, or to speak to the Swissquote analyst team, please do not hesitate to contact.