Is it deflation or inflation we are worried about? Speculators and the masses fear inflation. Price fear is driving individuals to the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢, the real deal, no Ã¢â‚¬ËœfoolÃ¢â‚¬â„¢s goldÃ¢â‚¬â„¢ for them! But, current interest rate indicators do not foresee a rising price issue, bond yields remain low. In fact, US 10-years have a better chance of printing 3% first before ever retreating back to $3.50. Gold technical analysts are encouraging investors to hold onto long gold positions as bullion has Ã¢â‚¬Ëœsignificant upside potentialÃ¢â‚¬â„¢ to reach as high as $1,500 an ounce. Where is my Midas touch?
The US$ is weaker in the O/N trading session. Currently it is higher against 1 of the 16 most actively traded currencies in another Ã¢â‚¬ËœvolatileÃ¢â‚¬â„¢ trading range.
Two Cbanks policy meetings take center stage today, the BOE and ECB. The market anticipates that they will remain on hold, both in terms of policy rates and Ã¢â‚¬Ëœnon-standardÃ¢â‚¬â„¢ policy measures. Apart from the RBAÃ¢â‚¬â„¢s surprising announcement earlier in the week, European policy makers prefer a Ã¢â‚¬Ëœwait and seeÃ¢â‚¬â„¢ approach. This will maintain their on-going excuse to Ã¢â‚¬Ëœevaluate whether the tepid signs of economic recovery find much needed tractionÃ¢â‚¬â„¢. It would also buy them time to test if their own financial systems function independently without any further support from policymakers. Fundamentally, Europe and the North America are not as Ã¢â‚¬ËœhawkishÃ¢â‚¬â„¢ as Australia. Analysts expect rates to remain on hold well into next year. What are we to expect from TrichetÃ¢â‚¬â„¢s communiquÃƒÂ©? Being predictable, expect the same copy from last monthÃ¢â‚¬â„¢s. European policy makerÃ¢â‚¬â„¢s recent rhetoric maintains a note of caution and to expect an Ã¢â‚¬ËœunevenÃ¢â‚¬â„¢ recovery despite modest signs of improvement in their economies. So, Trichet should reiterate that rates are currently appropriate, hinting at a prolonged period of time for low refi rates. Again, the ECB will confirm that an Ã¢â‚¬Ëœexit strategyÃ¢â‚¬â„¢ is ready but the time for its implementation has not arrived. The current Ã¢â‚¬Ëœstatus quoÃ¢â‚¬â„¢ is also likely to be reiterated by the BOE. Where is the fun in all this?
The USD$ is currently lower against the EUR +0.67%, GBP +0.70%, CHF +0.75% and JPY +0.39%. The commodity currencies are stronger this morning, CAD +0.66% and AUD +1.59%. After printing its strongest level vs. the USD in over a year earlier this week, the loonie did a temporary about turn on the back of lower oil prices and on the fact that recent strength was over extended. Already this week we witnessed some Canadian fundamentals aiding the loonyÃ¢â‚¬â„¢s flight. For instance the IVEY PMI (61.7 vs. 56.2) lent support. Digging deeper, the report showed good news on jobs (55.9 vs. 47.5, m/m). An optimist would say that the IVEY employment news would suggest a positive upside risk for FridayÃ¢â‚¬â„¢s Canadian jobs report. Market consensus is already looking for a +5k gain. Buying the rumor and selling the fact could endanger the looniesÃ¢â‚¬â„¢ weekly strength being unwound with anything less than +5k! The loonie has gained +15% vs. its southern partner and incidentally was the best-performing of G7 currencies against the greenback last week. Expect dealers and speculators to lighten their position ahead of tomorrowÃ¢â‚¬â„¢s employment report a tad. It would not be a surprise if the currency managed to achieve parity before Christmas all things being equal!
No wonder Governor Stevens at the RBA remains a firm hawk. The Sept. Australian employment report beat all expectations last night, increasing by +40.6k on the month vs. a forecast of -10k. This probably provides another nail in the coffin for a 25bp rate hike in Nov.! The futures market is currently pricing in a +86% chance of another hike. Will the RBA be Ã¢â‚¬ËœgradualÃ¢â‚¬â„¢ in its monetary cycle or show rapid normalization of interest rates? (0.9041)
Crude is higher in the O/N session ($70.32 up +75c). Finally, the market is relying on fundamentals to price the black-stuff. YesterdayÃ¢â‚¬â„¢s weekly EIA report was bearish for the commodity. With the USD finding some life again, it was only a matter of time before technical resistance levels above $71 would prove again to be impregnable for the market. The weekly report showed that inventories of gas and distillate fuel (includes heating oil and diesel) increased. Gas inventories rose +2.94m barrels to +214.4m, w/w. That was a threefold increase, way more than market consensus. Distillate stocks advanced +679k barrels to +171.8m (the highest print in 26-years!). The gain in gas supplies has left inventories +6.9% higher than the 5-year average. Not to be outdone, distillate inventories are +30% higher for the same time period. Refineries are operating at +85% of capacity, +0.4% w/w. In contrast, crude inventories declined -978k barrels to +337.4m. The market had expected a +2m gain. Despite this, stockpiles remain +10% above the five-year average. Strong evidence that demand destruction is alive and kicking. Global output remains healthy. Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. They have just added to the global glut of the black-stuff. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75.
ItÃ¢â‚¬â„¢s difficult to stop a runaway train! Gold managed to print a new record high this morning and looks to improve on its rich vein of strength. ItÃ¢â‚¬â„¢s the debate of deflation and inflation that spurring the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ higher. Investors are concerned that an economic recovery will promote inflation, this despite interest rate product telling us otherwise ($1,058).
The Nikkei closed at 9,832 up +32. The DAX index in Europe was at 5,715 up +75; the FTSE (UK) currently is 5,151 up +43. The early call for the open of key US indices is higher. The 10-year bonds eased 6bp yesterday (3.18%) and are little changed in the O/N session. Dealers temporarily managed to cheapen the curve ahead of the $20b 10-year auction. However, any dips were quickly brought and bonds managed to record its 1st winning day in 4. With the green back strengthening also supported the demand for US debt product. ItÃ¢â‚¬â„¢s worth noting that indirect bidders (mostly foreign Cbanks) bought 47.4% of the notes. Investors are happy to seek duration (price sensitivity to interest-rate change expressed over time) and today will need to take down $12b long-bond product.
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