All That Glitters

Last night the US Federal Reserve did as was expected and kept their benchmark rates unchanged, but in doing so shifted their outlook bias towards a more accommodative stance in the coming months. That took the form of the Fed changing its narrative to ‘moderate’ from ‘solid’ in terms of their growth outlook, in process acknowledging that inflation remains stubbornly subdued. That has led the markets to conclude that the chances of a July cut have increased even more.

Naturally, the path of future Fed policy is going to be data dependent and whilst trying to maintain their independence it’s clear that to a certain extent the US central bank has bowed, not just to global headwinds, but to some degree, political pressure as well. Perhaps that’s unsurprising given the heat placed on Powell and his colleagues by the administration most recently. Quite honestly, if that’s the only reason, then it saddens me, but I don’t suppose I’m alone with those sentiments.

The other thing to note here from the Fed’s perspective is what has taken place elsewhere in terms of central bank activity. The RBA cut rates earlier this month and the ECB looks like its headed in the same direction following comments from Mario Draghi earlier this week. The BOJ left policy unchanged overnight too which wasn’t exactly a surprise and mutterings elsewhere from other major central banks have been very much in the same vein, with the exception of the BOE which I will cover in more detail in a second.

So, the impact on the markets from the Fed’s language shift has seen US bonds rally further overnight with the 10year yield dropping through 2%, currently at 1.98% as I write this ahead of the European opening this morning. Equity markets are higher too with US futures currently pricing in gains for the opening there later on.

However, the biggest move overnight has been seen in gold which has surged through that $1358.50 resistance level I highlighted last week, racing close to $1400 during the Asian session. So I will once again share the same chart with you as I did last week and you can now see how a breach of that trend line played out earlier today.

So, given the whole global backdrop and growth, inflation and geopolitical concerns its really hardly surprising that the shine is back on the yellow metal. I see that an Austrian 100 year government bond pays you nothing which is just bonkers quite frankly and furthermore; why would you want to give your money to any government and have to pay them for the privilege no matter what the time frame is?

So with German bond rates looking like they are headed to -0.50% in the 10years its understandable that money has woken up wanting some other home beyond equities if the global growth outlook is so dire. Holding gold in dollar terms though is still a cost even at sub 2% yields.  However, in JPY, EUR or CHF even, its an entirely different matter because in relative terms gold now offers a carry gain. Granted at some point there’s a risk of price and valuation, but right now that doesn’t yet appear to be on the radar.

Understandably lower US yields have also dented the dollar too with the USD index dropping back below 97.00 as the US currency loses ground against all its major counterparts. The notable laggards here have been the AUD and the EUR. Granted the EURUSD is higher this morning, but once again we are talking small margins here and that’s because wherever the US goes in terms of monetary policy it looks likely that the ECB will follow if not actually lead the way.

The move in gold has also been helped by a firmer JPY over the past 12 hours as the USDJPY falls through support around 108.00, closer to 107.50. Looking at the chart on this one now, it looks likely to head, in the short term, towards the next level of support which currently lies around 107.00.

The pound has benefitted from the dollar’s demise too, but that was already rebounding yesterday anyway having previously dipped below that 1.2560 support level I told you about in a previous update. Granted that breach did see stop losses triggered, but the move only ran to as far as 1.2506 before this current rebound kicked in. Leaving the dollar asidefor one minute this rebound may have something to do with the fact that the Bank of England has been decidedly hawkish most recently.

Well, that rhetoric looks increasingly unique to the UK doesn’t it with everyone else looking headed in the opposite direction. That will surely make any rate increase decision for the MPC much harder to arrive at, not just today, but in the months ahead too. The fact that the pound has rallied this week will probably alleviate the need to act immediately anyway.

Personally, I think the hawkish talk from the unreliable boyfriend has been all bluff and besides he’s about to become the ex-boyfriend anyway. Consequently, I expect the BOE to do what they do best today-nothing at all.

However, if by some chance the MPC do take it upon themselves to launch a pre-emptive strike, then right at the is very minute that could put a further, strong short term tailwind behind the currency. The exchange rate is certainly something we know that Carney and his colleagues are watching very closely right now and the fate of the pound is very much at the centre of MPC policy. In sharp contrast to most of the leading central banks, the BOE need a firmer currency to avoid potentially damaging monetary policy decisions down the road.

Indeed, that’s certainly the case, albeit in the opposite direction for the US president too as he has upped his currency rhetoric markedly over the past couple of weeks. Many months back I outlined my view of the grand ‘Trump plan’ in a somewhat ‘tongue in cheek’ social media article where I outlined the various stages of his gambit. One involved starting a global trade war (which he has certainly done his level best to achieve) and the other was to get the dollar lower for a protracted period.

Well, to date he’s been unsuccessful on the latter, but it looks like he’s not giving upon it any time soon!  

Important Economic Releases Due Later This Week

20/06- 12.00pm UK Bank of England Policy Decision

            (No Changes Expected)

20/06- 3.00pm US May Leading Index

21/06- 1.30pm Canada April Retail Sales

21/06- 2.45pm US June Manufacturing and Services PMI