A golden day for sterling

Given that Tuesday was a supposedly news and data light post-US holiday trading day, quite a lot happened overnight. The action going on in currency and commodities markets contrasted a quiet equities session on Wall Street, with the major indices finishing ever so slightly higher, dragged up by an excellent Walmart result. The S&P and Dow Jones both rose 0.20% for the day.

The currency markets saw plenty of excitement though. The Swedish krona fell 0.46% against the euro to 10.5600 following an abysmal CPI number, throwing the Riksbank’s plan to hike rates through 2019 into doubt. We’ll add that to the list of central banks facing the same problem recently.

The contrast couldn’t be stronger in the UK with the British pound smashing through 1.3000, rising 1.10% to 1.3060. The rise was driven by strong UK data with wage growth touching multi-year highs of 3.40% and unemployment at a mere 4.0%. Maybe some of the hand-wringing naysayers summoning the riders of the apocalypse on a hard Brexit should calm down a little because Her Majesty’s Kingdom seems to be doing just fine right now. That said, going long GBP anywhere near 1.3200 could prove to be a perilous trade until a deal is secured.

The euro shrugged of poor data (yet again) from the German ZEW and Eurozone construction, rising to 1.1350 against the dollar. This was likely more to do with the dollar being generally weaker overnight than the single currency turning a corner, and data from Europe clearly shows the Eurozone slowing in contrast to the UK. Against this backdrop, Brussels might want to crack open a decent red instead of the cooking wine for UK PM Theresa May’s next visit.

The offshore Chinese yuan rallied sharply against the dollar with USD/CNH tumbling 0.45% to 6.7455. This is rumoured to be down to US demands that China doesn’t devalue its currency as part of the overall trade deal. I suspect this will leave China’s negotiators spluttering their green tea, but the move overnight should ensure a strong start for regional currencies today.

Gold exploded higher overnight, rising USD15 to 1,340.00. A softer US dollar only partially explains the move. Falling developed market bond yields will be playing a part as Sweden looks likely to be the latest country to leave the rate normalisation party central bankers have been throwing. Most importantly though is what gold is telling us about the economy in 2019. As a safe-haven asset, gold typically does very well in times of recession and central banks turn on the easing spigots. Golds price action this year suggests the 2019 equity rally thus far may be the last dance before the bar closes.

FX

We would expect the regional currencies to open stronger following the CNH rally overnight. The US dollar seems to have slowed down for now after an excellent run that may set markets for a period of profit taking and stronger G-10 currencies. This could be temporary however as the US economy continues to fire on all cylinders for now, and with partly normalised yields – in contrast to many of its global peers – it’s hard to bet against the big dollar longer-term in 2019. The Federal Reserve may be nervous, but the US is nowhere near a recession.

Equities

Regional markets should follow Wall Street’s lead and trade in the green this morning. Bullish sentiment will be tempered however by progress (or lack thereof) in the US-China trade talks and ahead of the release of the FOMC Minutes tomorrow morning.

Oil

WTI and Brent diverged overnight. News that Iran’s exports had risen tempered Brent’s gains and it finished down 0.10% at USD66.45 a barrel. WTI continued its advance, rising 0.90% to USD56.45 supported by Venezuelan matters. Both contracts will also be awaiting more clarity from the trade talks in today’s session.

Gold

Gold bugs will be rejoicing after the overnight session and this sentiment should flow into Asia’s markets, even if we see a little profit-taking initially from North American traders. As I’ve been saying for some time, gold’s price action has been constructive, pointing to higher prices. And after the overnight move, gold is now within shouting distance of a multi-year high resistance zone between 1,370.00-1,390.00 dollars an ounce, capping gold since 2013. The technical picture implies any dips will be well supported going forward.

A break of the long-term resistance would likely only be triggered by the failure of the trade talks in the near term. However, the markets should be concerned about the story gold is telling in terms of the global economy if these multi-year highs are broken.