Buoyed by rate cut expectations after the Bank of Canada and the European Central Bank (ECB) cut rates earlier this week, spot gold rose to $2,387 on Friday, the highest level since May 22. However, the metal crashed on a robust US nonfarm payroll report. Spot gold closed with a loss of 3.49% at $2,294 on Friday. It fell nearly 1.40% in the week.
Dollar Index and yields
The Dollar Index has been weakening on rising Fed rate cut expectations and healthy risk appetite. However, a solid US nonfarm payroll report saw the Index surging on Friday as it closed with a gain of 0.70% at 104.93 on Friday and a weekly gain of 0.25%.
The 10-year US yields tested 4.271% on Friday, the lowest level since April 1. However, the strong job report led to a sharp decline in the US bonds on Friday. The ten-year US yields closed with a gain of 3.28% at 4.43%, though the yields were still down nearly 1.75% on the week. The 10-year yields may test the resistance at 4.50% in near term, which will be bearish for the yellow metal. The 2-year US yields surged over 3% on Friday to close at 4.89%.
Data and events round-up
Bank of Canada and the European Central Bank (ECB) cut rates on Wednesday and Thursday respectively. The ECB has however not given any clear guidance for further rate cuts; it is likely to proceed on a case-to-case basis.
US data released in the week ending June 7 showed that the US economy is still doing reasonably well. ISM manufacturing data (May) at 48.70 came in below the forecast of 49.50, though the ISM employment Index soared back into expansion zone. JOLTs job openings (April) at 8,059K fell short of the forecast of 8,350K, and so did the durable goods orders (April final). However, the ISM services Index (May) at 53.80 was well-above the forecast of 51. The US nonfarm payrolls showed that the US employers added 272K jobs in May vs the forecast of 180K, which defied the weaker than expected ADP report. Although the unemployment rate at 4% was above the forecast and the prior figure of 3.90%, average hourly earnings rose 0.4% m-o-m and 4% y-o-y, which topped the respective forecasts of 0.30% and 3.90%.Fed rate cut bets
After a solid nonfarm payroll report, traders have shifted their rate cut expectations from July to September.
Data and events next week
The major US data on tap next week include CPI (May), PPI (May), University of Michigan, sentiment (May) and inflation expectations. The US Federal Reserve will deliver its monetary policy decision on Wednesday. As such, no change in the Fed fund rate is expected.
Market participants will be looking for clues to rate cuts, especially as some of the major central banks have cut rates and some of the US data have been weak. China’s PPI and CPI will also be closely watched for gauging the strength of the Chinese economy. Out of Europe, the UK’s April job report and monthly GDP (April), and Germany’s CPI (May final) will be of particular interest to traders.
China’s Central Bank pauses gold buying
Data showed that the China’s Central Bank did not buy any gold last month, thus breaking its 18-month long spree of continuous buying. In April, the PBoC bought only 60K ounces of gold as compared with 160K ounces in March and 390K ounces in February. In addition, China’s gold imports in April were down around 30% from March level.
It appears that Chinese gold buying slowdown is more about high prices rather than anything else. So, in all probability, it may resume gold buying as prices fall. Nonetheless, this pause, for now, is a bearish development for the metal.
ETF
Total known Global gold ETF holdings stood at 81.034 Moz as on June 6, which is a six-week high level on a weekly basis.
Weekly outlook
Spot gold is expected to trade with a bearish bias on rising yields and China’s gold buying pause. The metal may test the key support at $2,277 in near-term, though some short covering is possible ahead of the US FOMC monetary policy decision and the CPI data. The next major support is at $2,250. Resistance is at $2,315/$2,330.
It is expected that investors will continue to buy the dips for medium to long term positions as fundamentals remain constructive. The rate cut has been delayed, not cancelled. Moreover, central banks continue to buy gold at a healthy pace. Chinese Central Bank buying is expected to return sooner than later as prices are significantly down from the cycle high of $2,450. Rise in the US unemployment rate and other central banks cutting rates are also positive for the metal.
(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
