Gold Weekly: Central Banks Dampening Rate Cut Hopes?

Market Analysis /
Stephen Innes / 22 Oct 2019

Despite the plethora of headline risk and geopolitical rancour, gold still traded better-off last week, likely on the back of improving news flows around the US-China trade talks. Butif you actually trade gold you can feel the lack of emotion in the markets these days as buying interest continues to run tepid.   

 Source: AxiTrader

The expectation for weaker economic data and the current level of central bank policy response seems to all be factored into the current price, suggesting Gold traders need a new catalyst. The recent weak data, plus Fed comments and trade risks, are enough to support gold near term but bullion is having a tough time holding all its gains above USD1,495 last week.

After making early gains during the week on the back of Brexit and U.S-China trade deal jitters, gold dipped into weeks end on signs that fewer central banks around the world might ramp up on another round of easing.

 

Central Bank Guidance
Some central banks are now questioning the effectiveness of lowering interest rates below 1% while others who are below the zero lower bound are increasingly looking for their government to do their share of the heavy lifting. This may not support gold as a shift to the fiscal policy could send bond yields higher and lessen gold’s opportunity costs. 

Earlier in the week two local central banks – Singapore and Korea – eased somewhat 'hawkishly' (MAS only 50bp, BOK with two dissents), but kept reasonably dovish forward guidance, although this move was significantly less dovish than the market had expected. 

RBA Governor Lowe, speaking at the IMF on Friday, hosed down prospects of further interest-rate cuts, saying the Australian economy should return to trend growth next year. While noting that further OCR cuts were possible, Lowe said he "wouldn't assume it". 

Bank of England Deputy Governor Dave Ramsden put the prospect of rate hikes back on the table but only if the U.K. leaves the EU smoothly, with a transitional deal.

Fed President Robert Kaplan Kansas and City Fed chief Esther George, who had already dissented from the last two decisions, did their best to walk back the dovish market expectations.

Even with the Chinese GDP growth testing the lower bound of the official annual target 6-6.5%, with high CPI inflation, it potentially reduces the scope for future monetary policy support.

READ MORE: WHAT ASIA INVESTORS NEED TO KNOW FOR THE WEEK AHEAD (OCT 21 - 25, 2019)


But Fed policy is the key for gold prices
 
Still, the near-term direction for gold always seems to end up focusing on the FOMC forward guidance and what it ultimately means for US bond yields and the US dollar.

The current market thinking is very supportive for gold as trade policy uncertainty continues to sour business sentiment and firms slow their pace of hiring. It’s possible that households will begin to experience deteriorating labour market conditions, causing them to pull back on consumption as their expectations dim.

On Friday, before the FOMC blackout period, Fed Vice Chair Clarida said that the Fed will act as appropriate to sustain the expansion and that the economy is in the right place with no evidence that the labour market is putting pressure on inflation. He says that inflation remains muted and that global growth estimates continue to be marked down.

This all begs the question of whether Clarida's comments are more about what he doesn’t say than what he does. While he would never want to pre-commit the Fed to ease in October, the lack of a more explicit pushback to market pricing of an all-but-certain two cuts is significant.

So, assuming two interest rate cuts are baked into the cake, gold prices would still find considerable comfort if US economic data continues to deteriorate and the market prices in the Fed cutting 75 basis points over the next three meetings.

But this does raise the million-dollar question: will monetary stimulus alone be enough to ward off the recessionary Grim Reaper? If the recessionary Grim Reaper comes knocking on the US door, investors may then be thankful they backed the truck up on  gold.

 

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The USD and Gold

There is an active debate about whether this $60 Billion per month of Fed asset buying is QE or not QE. The Fed insists it is not, but many observers say it is. The dollar can trade very sensitive to shifts in the Fed balance sheet, so this could be a critical inflexion point for current FX sentiment. The dollar turned bullish once QE stopped in 2014/2015 and flatlined as the balance sheet flatlined. The USD then ripped higher again starting January 2018 as the Fed’s balance sheet started contracting. If the Feds are turning on the QE taps one must assume this might be negative for the USD and supportive for Gold.

 Source: CME Watch Tool


IMM Commitment of Trader

Linked to the reduction in risk-off sentiment are: (1) the JPY position, formerly long, swinging back to a small net short, and (2) the long gold positions are now trimmed to July levels of ~40% of open interest, although prices remain some USD 80/oz higher than July. The decision here concerns whether this is the beginning of a more significant reversal in risk-off premium or a merely a blip in the trade calm.

Source: CFTC

CTA levels to watch on a quant-based analysis 

The next level below that would trigger long liquidation is $1474.4, before $1472.40, which would activate short on a position flip.

This Weeks Drivers

  • Trade Talks (Currently Negative for Gold)
  • Brexit (Currently Mildly Negative for Gold)
  • US Economic data (Currently Positive for Gold)
  • US Ten Year Bond Yields (Currently Negative for Gold)
  • US Dollar (Currently Positive for Gold)

 

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AxiTrader” in the news” on Gold and thank you to the journalists and editors for the coverage

Gold Dips on the Day, But up on Week  (October 18, Investing.com)

“If you actually trade gold you can feel the lack of emotion in the markets these days as buying interest continues to run tepid,” said Axitrader market strategist Stephen Innes. “The expectation for weaker economic data and the current level of central bank policy response seems to be all factored into the current price, suggesting gold traders need a new catalyst.”

Gold inches up on Brexit jitters (October 15, Reuters)

“There are some uncertainties since there is a lot to go through on Brexit. For instance, even if both EU and UK negotiators agree on terms, it still must go through the parliament,” AxiTrader market strategist Stephen Innes said.

 

Read more market views from Team AxiTrader: https://www.axitrader.com/int/market-news-blog/.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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