Arguably the three dominant talking points from discussions I’m having with clients centre on three main markets – gold, Bitcoin and the USD. I’d also throw in oil, with WTI crude (XTIUSD) gaining a punchy 8.8% last week, and this seems incredibly important as US inflation swaps have lifted from 1.91% to 2.06% as a result – the pick-up in inflation expectations would not have gone unnoticed by the Federal Reserve. And, with OPEC due to meet at the end of the month, the move would have rattled a few oil short positions and is certainly helping the NOK find its mojo.
While the news about Libra has part influenced the variability of Bitcoin, one could argue the move into $11,000 is also linked to the idea of a lack of broad currency appeal, and a race to the bottom in interest rates. Bitcoin is finding interest from clients, but it’s gold that has stolen the show. The yellow metal has opened the week on the front foot, as have WTI (0.7%) and Brent crude (0.5%), and this seems to be lifting S&P 500 futures a touch.
Technical traders, wanting to see a pullback in gold and a subsequent re-test of the breakout point of $1360, to confirm this is now support, may well be disappointed. The set-up on the weekly gold chart (see below) looks undeniably bullish, while the flow through the broader market has been incredible with managed money building on its net-long futures position, to stand at 151,000 contracts – the highest since April 2018.
In the ETF (Exchange Traded Fund) space, over $1.5b flowed into the GLD ETF (SPDR Gold ETF) on Friday, and judging by my scan that’s the biggest one-day inflow ever. We can also look in the options markets and see risk reversals (this is the difference between 25 delta call and put options) sitting at the highest level since 2009. The options markets provide the clearest message of where they see the likely path in price from here.
I maintain a view that gold has lost its status as an inflation hedge; in fact, the investment case is quite the contrary. Granted, it may have been historically, and if we saw a spike in inflation expectations that ran hard above nominal bond yields, subsequently resulting in lower ‘real’ yields, then this investment case may revert. However, that is not going to happen anytime soon, and the fact is ‘real’ (or inflation-adjusted) yield – the driver of gold – has been falling, at a time when both inflation expectations and nominal bond yields have been moving lower, just at slightly differing paces. The fact gold is rallying in all G10 currencies seems key too, although it’s the USD-denominated gold that’s getting the bulk of the flow.
USD looking vulnerable
That leads nicely to the USD, where we saw the greenback lower on the week vs all G10 currencies, with small follow through selling on today’s re-open. Like all central banks, the Fed has its eye on this week’s G20 Summit and specifically the meeting between XI and Trump, and have disclosed they’re prepared to adjust policy on what they don’t see. A headline from the WSJ that “The US considers requiring 5G equipment for domestic use be made outside China” has lowered the bar and expectations even further. Assessing the rates path, its probably no surprise to see 33bp of cuts priced for the July FOMC meeting, so at a very simplistic level this equates to one cut fully discounted, and a 30% chance of a second.
In terms of event risks, we see a raft of Fed speakers, but we need new news to alter expectations, and for that, It comes down to the economic data flow. Here, we see the market has its eyes on regional Fed manufacturing prints, consumer confidence and durable goods, as well as core PCE inflation. However, the real clincher will be the US payrolls report on 5 July, and another weak print seals the deal and a 50bp cut.
There has been a focus on the US Treasury yield curve, and specifically 2s versus 10s. A view has formed that the Fed needs to attack the yield curve, resulting in a steeper curve to help the financial sector, and this means getting ahead and influencing longer-term yields. While a steeper curve is usually thematic of a stronger currency, in this case, it would have the side effect of weakening the USD, and we see that in the price action in a number of USD pairs. USDCHF and USDNOK have seen the biggest moves of late, and rallies are to be sold (in my opinion), with USDCHF trending well and moves into the 5-day EMA likely to be heavily lent on. The USD index (USDX) printed an outside period on the weekly (last week), showing the bears have wrestled back some control, with the close below the 200-Day MA getting some attention.
RBA governor Lowe spoke in early Asian trade, and a few AUD leveraged shorts have heard enough, with the governor questioning the effectiveness of more easing. On the day, we see the AUD is outperformer on the session, with a gain of 0.4% and pushing into the top Bollinger band at 0.7000. So, 0.6980 to 0.7000 zone, seeming looking like a good place to fade moves on the day, with 50-pips taking the intra-day move to short-term overbought.
Published by Chris Weston, Head of Research, Pepperstone