After encountering some profit-taking over the past three trading days, Gold rebounded strongly yesterday and gained close to $15 to trade back towards $1180. Despite already recording gains close to $90 since the beginning of October, I remain bullish on Gold and believe that the metal can continue this strong momentum until the end of the year.
What needs to be taken into account is that it is not only pushed back US interest rate expectations that can provide positive momentum for Gold, but there is also increased potential for safe-haven assets because there is a great deal of confusion on global central bank intentions. Not only are the markets lacking clarity from the US Federal Reserve, but the threat is strong that both the European Central Bank and possibly Bank of Japan (BoJ) are going to ease monetary policy further. This looming threat could result in a lack of trust from traders to invest in currencies due to the unknown central bank intentions, which in my opinion increases demand for alternative assets such as Gold.
Speaking of US interest rate expectations, investors shouldn’t ignore the risk that the Federal Reserve is most probably not going to raise US interest rates this year and this means the USD has not necessarily “bottomed” out yet. As US interest rate expectations get pushed into the first quarter of 2016 and possibly beyond, the USD will be at risk to further periods of weakness and this will again provide positive encouragement to Gold traders.
It shouldn’t be understated that the GDP data out of China at the beginning of the week has huge implications on the US Federal Reserve. The central bank cited global economic weakness as a reason to leave US interest rates unchanged in September and the news that GDP growth in China has slipped below the government target of 7% is another blow to global economic sentiment. This makes it very difficult to argue for a US interest rate rise this year, especially considering the Fed had only recently cited global weakness as a reason to leave US interest rates unchanged.
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There are also continual growth concerns in Europe and Japan, alongside uncertainties around the health of the emerging markets meaning that declining economic momentum in China should not be seen as the only reason why the US Federal Reserve are clearly reluctant to begin raising interest rates.
My personal opinion is that the Federal Reserve completely missed the boat with an opportunity to raise US interest rates in September and it has now became very difficult to argue for a US interest rate rise in 2015.
WTI and the emerging markets
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Momentum for WTI is continuing to look very weak with the commodity beginning the new trading week by losing $2 to trade back towards support at $45.70. Although there is clearly interest in higher oil prices because it would be beneficial for the global economy, the outlook for WTI remains bearish and I think that prices are going to remain depressed for the remainder of 2015. The repeated signs of an aggressive oversupply of oil in the markets is going to remain a dominant threat to investor sentiment, and I also believe the weak sentiment over the global economy could lead to reduced demand for the commodity.
The combination of depressed commodity prices remaining the trend for a continued period and further signs of a decline in momentum in the China economy makes it very difficult for both the Malaysian Ringgit and Indonesian Rupiah to recover what have been extreme losses since the beginning of 2015. Both economies are commodity exporters, meaning an improved sentiment in WTI and a consistent price for a period of time would allow the opportunity for these currencies to at least consolidate before looking to recover some momentum.
The USD has strengthened and recovered some losses against both the Euro and Japanese JPY over the past couple of days, meaning that the UAE Dirham will have also noticed some positive momentum against these currencies. If the US interest rate expectations continue to get pushed back though, this will impact all currencies pegged to the USD and I would expect the Dirham to resume its recent slip against both the Euro and JPY. The currency is also beginning to lose some momentum against the GBP, however the UK currency is vulnerable to some weakness and this might not be a long-lasting trend.
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