China’s counterpunching?

Gold prices continue to rally, moving above the psychological $ 1500.00 mark, as Sino-US disputes make the central bankers around the world rather edgy. A case in point, the New Zealand Central Bank cut its benchmark interest rate by 50 basis points from 1.5% to 1% versus expectations of only 25 basis points cut. The Reserve Bank of India and the Bank of Thailand followed suit. The precious metal reached $1510.00 although has since had a minor pullback on Friday morning, back below the $1500.00 mark.

China’s own currency, the onshore yuan fell to an 11year low, now costing more than 7 to buy one US dollar which indicates that the Chinese may not rush to support it any time soon, or at the least support it less than they have recently. The Trump administration was quick to label China ‘a currency manipulator’, leading to People’s Bank of China Governor Yi Gang saying his country ‘will not engage in competitive devaluation’ CNBC reports.

On the other hand, some analysts expressed views that allowing yuan’s freefall, Chinese government has in fact weaponized its currency as the trade war intensifies.

The US stock markets started the week on the back foot as Monday saw a selloff of more than 3% for each of Dow Jones, S&P and Nasdaq. Although a rally back was observed on Wednesday, it seems the US stocks are ending the week under renewed downward pressure.
Back in the UK the second quarter preliminary GDP figures showed a drop of 0.2% versus expectations for a flat result. In reaction to this first quarterly contraction since Q4 2012, the pound sterling fell below 1.21 vs the US Dollar. It seems that every central banker in the developed world is trying to devalue their respective currencies by slashing rates and/or other easing measures. But the Bank of England benefits from that, mainly on the Brexit saga and a slump in the GDP without much effort on their part elsewhere? Not bad.

ECB published the economic bulletin after its July policy meeting expressing concerns that the current climate of “prolonged uncertainty” is “dampening economic sentiment”. The manufacturing sector is one to keep an eye on. Market participants seem to anticipate weaker growth in the coming quarters, therefore leading to a potential restart of Quantitative Easing. Nonetheless, the EURUSD moved higher during the week hovering around 1.12 currently.

So, if the widespread consensus a few months back was that a deal between China and the US could be struck by the end of 2019, now that favourable outcome appears to be becoming increasingly doubtful.

Currency wars are back?

US President Donald Trump tweeted that China and Europe are manipulating their currencies to compete with USA and not to be left behind, Bank of England Governor Mark Carney also talked down the pound sterling. Federal Reserve Chair Powell’s testimony to Congress was seen as dovish, suggesting an interest rate cut in the US later this month is a done deal. And that would happen amid full employment, solid economic growth of 3% per year and S&P 500 reaching an all time high above 3000. All leads to the suspicion of a return to a currency war?

Gold remained above $1400 mark as Bloomberg reported that central banks buying in 2019 is on track for 700 tons, which represents an increase of 73% compared with last year. The main reasons were slowdown in economic growth, geopolitical tensions and trade disputes as well as attempts to diversify reserves from fiat currencies.  

China June Inflation data showed CPI at 2.7%, in line with expectations the lowest since August 2016, which could be problematic for industrial profits going forward.

In the US, FOMC June meeting minutes saw many Fed officials calling for a rate cut as a ‘cushion for shocks’ adding that inflation expectations were inconsistent with the 2% goal.

In UK, the pound fell below 1.25 to the dollar to a low of 1.2440, the weakest level since April 2017. The slump was based on the lingering Brexit uncertainty still weighing on the economy which is expected to contract in Q2, the first time in 7 years. UK Prime Minister contender Boris Johnson maintains that the country must be prepared to leave EU without a deal. On Friday GBPUSD rebounded slightly around 1.2550.

Meanwhile the former International Monetary Fund Chief Christine Lagarde is set to be confirmed as the new ECB President in October. At the same time European Commission warned of rising downside risks and downgraded the euro zone economic outlook in its latest forecast. ECB minutes also indicated a governing council agreeing on the need to prepare for policy easing. Despite that we can see EURUSD holding between 1.1240 to 1.1280 range.

Welcomed pullback in Gold?

On the technical side
The news that made headlines for the past few weeks was Gold breaking above the $1350-1360 resistance area. The market had tried and tried to overcome that huge barrier for 6 years, forming a sideways range, which finally broke, pushing gold to within touching distance of the $1440 level.
It is worth remembering that $1430 was tested a few times back in 2013. It seems the market focused on those inflexion points. Hence it has proved a good ceiling this time around (for now?) as gold opened lower this week and is currently sitting around $1392. From a technical point of view that gap created by the lower opening ($1392) to Fridays close ($1408) is there to be filled, although it remains to be seen if/ when it will happen. Additionally, $1390 represents support as it is a 38.2% Fibonacci retracement from an all time high of over $1900, back in Sep 2011, to the lows of $1046 seen in December 2015.
So whilst breaking out of the long term channel is definitely welcomed, the recent gains have been quite steep. For the Bulls in the market, a pullback could be the catalyst to give gold some breathing space on the RSIs and for future prospects, potentially allow room for the next leg up. We can see a target/resistance at $1480 – $1490 range, which represents 50% Fibonacci retracement, and then $1520-$1550 zone which was solid support between 2011-2013.
Any further retracements should find very healthy support back in the well-established $1350-1360 level, where the market found the resistance on the way up.

On the fundamental side
The bullish narrative
We feel that gold being back on the bullish map is very much dependent on a weaker US dollar because of the inverse correlation between the two.
Over the weekend US President Donald Trump and China’s Xi Jinping met at the G20 in Tokyo and it seems were back on speaking terms. On one hand Trump agreed not to introduce new tariffs on Chinese goods and allowed certain US companies to do business with telecoms group Huawei. On the other hand, China agreed to buy more agricultural goods which should help the struggling American farmers.
As it happens the political interests for both sides somehow aligned this time. Trump has an election coming next year and the ongoing warrior like attitude may not help, leading to expectation of him to tone it down a notch. President Xi has the Communist Party celebrations in October and because that’s the 70th anniversary since Mao founded the People’s Republic of China, will want to focus on prosperity, rather than tensions.
As a combination of the above, the rather positive meeting could spark renewed risk-on attitude with investors returning to stock market. Couple this with the anticipated interest rate cut by the Federal Reserve (which is overwhelmingly priced in) later this month, could push the US dollar lower. This potential scenario is probably what President Trump desires (higher stock market is good for election and lower dollar helps with paying down the deficit hid long term mantra).
It is for this very reason why this week’s non-farm payrolls report possibly has more significance than usual.

The bearish narrative
If, on the other hand, we have a strong reading from the non-farm payroll figures, that will soften the Fed’s hand in making the case for a rate cut, which in turn could scare off investors. Running back into the safe haven of the US dollar will become a distinct possibility which, at least in short term, might hurt gold prices.
This, combined with a rising stock market after the G20 meeting, might in itself be enough of a reason for Fed Chair Jerome Powell to hold fire for now and not start easing this month, especially when Trump has accused him of being wrong so many times. Forcing him to give in to pressure from the president and slashing rates on a rebounding stock market would raise questions on the Fed’s independence.

US-China trade talks at G20

Gold’s breakout above levels that held repeatedly since 2013, making a high of $1439, has been described as a perfect storm of technicals and fundamentals. Geopolitics, in the form of US tensions with Iran, Sino-US trade dispute, a Federal Reserve getting ready to ease again constantly bullied by a President who desperately wants a weaker dollar (and higher stock market), all lined up to support the precious metal.
China’s Commerce Ministry said tariffs by certain countries are a threat to the global economy, although they agreed to keep open the communication channels with the US. Meanwhile US Commerce Secretary Wilbur Ross reiterated Trump’s tariffs threats are not a bluff, although his camp is looking for a ‘reasonable deal’ with China over trade.
Presidents Trump and Xi will meet on Saturday in Japan at the G20 summit and the media seems cautiously optimistic, although both sides aren’t giving much away.
Boris Johnson, the front runner to become the UK Prime Minister, said Parliament is now ready to back a no-deal Brexit and repeated his promise to exit by October 31 this year. Fear grows among Brussels politicians that a no-deal Brexit is increasingly becoming unavoidable. After encountering good support at 1.25 to the dollar, the sterling soared to 1.2750 which was good resistance in the past.
ECB President Mario Draghi hinted last week that more stimulus will be needed if the outlook remains concerning, amid lingering uncertainty regarding trade tensions. A string of economists were quick to predict the central banker will emphasize that more and more in the near future and eventually take action, possibly from September onwards. The EURUSD is sitting just below 1.14.
After going south for a good 18 months, Bitcoin more than doubled since early May reaching above $13,800 and the steep surge made everyone remember the booming second half of 2017. It retraced to $10,500 and looks to be stable just below $12,000 on Friday. However Bloomberg reports ‘the pop culture zeitgeist isn’t quite as giddy’ as apparently Google searches for the word bitcoin were five times higher in December 2017. On the other hand, that episode made Bitcoin & co significant enough that a lot more people are now clued up about them. Facebook announced plans to issue their own crypto currency, Libra, in a sign that institutional adoption is gathering pace.

Gold price breaks higher

Gold made a break above the $1350 – $1360 area which has offered solid resistance for the last few years, reaching $1400 level. The move came after the Federal Reserve hinted it will soften its monetary policy thus hurting the greenback.
China has cut its holdings of US Treasury by $7.5 billion in April to $1.11 trillion, the lowest mark in almost two years according to Bloomberg. At the same time People’s Bank of China added 240 billion yuan into the banking system, via a one-year (medium term) lending facility, in an attempt to increase banking liquidity. To further counter the US tariffs and limit the damage on its economy, China has lowered duties on non-US imports.
The US Federal Reserve held interest rates unchanged in a range between 2.25% – 2.5%, as anticipated, but added the economic activity has been rising at a moderate pace (changed from ‘solid pace’ last month). Chair Powell acknowledged that inflation dropped, trade risks have grown but ‘he wanted to see more’ before cutting. Markets have now almost fully priced in a rate cut of 25 basis points in July with further cuts expected to follow. Quite a turnaround over the year..
After dropping to a recent low of 1.25 to the dollar, the pound sterling managed a small rebound following steady inflation data with CPI figures coming in at +2.0%, in line with consensus. However, selling pressure remains with the continues political uncertainty. On Thursday, the Bank of England left its benchmark rate unchanged at 0.75% with overall language also remaining the same.
Meanwhile ECB President Mario Draghi said more rate cuts are part of the central bank’s key tools, joining the US Fed in taking a renewed dovish stance. Ironically, such actions attracted indignation from President Trump who tweeted that ‘ECB chief remarks make it unfairly easier for them to compete against the US’.
Reserve Bank of Australia has released its June 2019 monetary policy board meeting minutes saying further easing would be appropriate. The labour market, in particular, would be expected to bear the most weight, although lower rates are expected to push down the value of Aussie dollar.

US June payrolls up by 224k vs 160k expected

 Gold tumbled to $1383 on the back of a stronger USD, following a positive meeting between Chinese and US Presidents over the weekend. Nonetheless the sell-off was rather short lived and a rebound soon followed with the precious metal pushing back above $1430 within two days. Hitting perfect technical retracement levels. 

The highlight of the Trump-Xi meeting at G20 summit is that both sides have agreed to restart trade talks and there will be no new levies on Chinese goods. Meanwhile the focus shifted with and the US proposing to add more tariffs to $4 bln worth of EU goods. 

China’s June Caixin Manufacturing PMI came in at 49.4 vs 50.1 anticipated. It is the second lowest reading since June 2016 showing a contraction in manufacturing as the overall economy slips further into the red. However Premier Li Keqiang was adamant earlier in the week that China will not resort to yuan devaluation. 

ECB policymakers seemed confident they don’t need to add monetary stimulus in July preferring instead to wait for more data on the economy (no mention of QE). EURUSD was on the downside for the whole week testing lows of 1.12 at the time of writing. Meanwhile EU leaders agreed to appoint Christine Lagarde (the current IMF chief) as the next ECB President 

OPEC agreed to extend the production cuts by an additional 9 months, concerned with the excess oil supply from the US. The trade truce is seen as bullish for global growth but the rally in oil prices was short lived as the markets came off the highs. 

On Friday, the US nonfarm payrolls report showed 224k jobs were added in June, a lot higher than markets had anticipated. In reaction, the Dow fell 100 points and gold prices slipped below $1400 (hovering around $1415 before the announcement) amid a strengthening US dollar. Analysts were quick to speculate the numbers would now make it much harder for the Fed to justify a rate cut at the next meeting ( if it wasn’t for a meddling President who has three words in regards to monetary policy ‘cut cut cut’….). 

The pound sterling started the week on the back foot due to ongoing poor UK data. It fell below the previously good support level of 1.25 USD after the US jobs report.