FX: Why There's No Love for Gold

• FX: Why There's No Love for Gold Dollar - How the Greek Crisis Affects America
• AUD Hits 6 Year Lows, RBA Leaves Policy Unchanged
• NZD: China Gets Desperate, 25% of Stocks Halted
• USD/CAD: Delayed Reaction to Old Decline
• Dollar: Offers Safety and Yield
• Sterling Hit by Sharp Slide in Gilt Yields

 

FX: Why There's No Love for Gold

Two of the biggest beneficiaries of the crisis in Greece are U.S. dollar and Japanese Yen. Demand for safe haven currencies is natural in times of uncertainty but gold should also be performing.  However instead of rising, the price of gold has fallen to its lowest level in 15 weeks intraday. The lack of a safe haven bid in gold tells us one of two things - first, a subset of investors are still holding out hope that a deal will be done and second, the prospect of an eventual increase in U.S. rates (even if it is delayed) makes the dollar more attractive than gold.  At the same time, the slowdown in China's economy along with India's proposed plans to restrict gold imports through the introduction of gold linked sovereign bonds has also affected demand.  Gold is in a long term downtrend and while further losses are likely, if central banks around the world start to talk about increasing stimulus to stem the volatility, then gold will regain its luster.  In the meantime, everyone should expect the wild swings in the euro to continue.  Greece could submit a new proposal as early as Wednesday according to Eurogroup Chair Dijsselbloem and the next step would be for Greece to request a loan from the European Stability Mechanism (ESM). If the loan is granted, it would throw a lifeline to the cash strapped nation and provide the government with much needed short term respite.  The decision won't be easy because EZ nations would have to bear the risk of losses but if Greece commits to its reforms, creditors could actually get their money back. The alternative would be losses - and lots of it.  There are many European policymakers that believe a Grexit is inevitable.  ECB member Rimsevics was the most vocal - he said the most realistic scenario is the introduction of another currency for Greece and one less EZ member.  We can't see a conclusion to the Greek crisis that does not involve some form of debt relief but it will take a while before European nations are willing to agree to that.  So euro could bounce from here but we will still be looking to sell the rallies.  

AUD Hits 6 Year Lows, China Gets Desperate

While the U.S. dollar and Japanese Yen were some of the biggest beneficiaries of the Greek crisis, the biggest losers are the Australian and New Zealand dollars. AUD/USD dropped to its weakest level in 6 years while NZD/USD fell to its weakest in 5.  The Canadian dollar also extended its losses and came within 50 pips of its 6-year low versus the U.S. dollar.  Investors fear that the Greek crisis, sell-off Chinese equities and decline in commodity prices could lead to a more dramatic slowdown in Australia, New Zealand and Canada's economy.  Interestingly enough the Reserve Bank of Australia made no mention of China in last night's monetary policy statement. The RBA left interest rates unchanged and said further exchange rate depreciation seems likely.  While they may be satisfied with the recent decline in AUD/USD, lower than average long term growth, spare capacity and the drop in iron ore prices could lead to additional weakness for AUD/USD.  If commodity prices continue to fall and Chinese stocks fail to stabilize the RBA could reduce rates in August or December. The possibility of easing (regardless of how small) will keep AUD and NZD under pressure.  Meanwhile China is getting desperate - nearly 25% of Chinese stocks have stopped trading despite Beijing's efforts to keep stocks from falling further.  The Shanghai Composite Index dropped another 1.29% while the Shenzhen Composite fell 5.3%.  Over the past month, both indices have lost more than 27% of their value.  We are certain that more steps need to be taken by the Chinese government before stocks finally bottom and this could include monetary easing.  Canadian building permits is the only piece of economic data scheduled for release from the 3 commodity producing countries.  Oil prices have stabilized above $52 a barrel but the overall decline will still take a big toll on Canada's economy.  

Dollar: Offers Safety and Yield

The U.S. dollar traded higher against all of the major currencies today with the exception of the Japanese Yen against which it was unchanged.  Although the trade deficit increased and exports dropped by the most in 3 months, investors shrugged off the report and focused primarily on risk appetite.  The dollar has been a big beneficiary of risk aversion flows and tomorrow, the FOMC minutes will most likely remind investors that the dollar is also attractive on a yield basis.  However given that the last meeting in June included a press conference and the latest Fed forecasts, we don't expect any surprises.  Janet Yellen failed to provide a clear road map for liftoff which investors found disappointing at the time. Yet from the FOMC statement and forecast we know that the majority of policymakers expect rates to rise this year with a larger number looking for two quarter point rate hikes in 2015. While Yellen said no decision has been made on the timing for liftoff, she admitted that there is enough data to justify a rate increase. More importantly, she went out of her way to downplay the importance of the first hike. While the Fed's view may have changed since the last meeting, there may be more optimism than caution in the minutes. 

Sterling Hit by Sharp Slide in Gilt Yields

Sterling ended the day sharply lower against the U.S. dollar amidst mixed economic data. Industrial production rose 0.4% but manufacturing production fell 0.6%.   Based on the 17bp slide in 10 year Gilt yields (versus the 2bp slide in 10 year Treasuries), investors are rethinking their BoE rate hike expectations.  While we believe that the sell-off is overdone because the earliest the BoE would have raised rates is 2016, sterling traders should keep an eye on yields.