USD flat-lined amid Fed Chair nomination, tax plan in focus
The nomination of Jerome Powell as next Federal Reserve Chairman came as no surprise. The US dollar barely reacted to the news. The US Dollar Index treaded water within its weekly range, between 94.4 and 95. Donald Trump definitely made the choice of stability and continuity by choosing the New York republican Fed President. The USD edged slightly lower after the announcement as investors discounted completely the risk that a more hawkish candidate will replace Yellen. Similarly, US yields lost some ground yesterday, especially on the long-end of the curve. The 10-year eased to 2.35%, while the 30-year returned to 2.83%.
Today is NFP Friday and we’ll likely get some action following last month’s disappointing reading. NonFarm payrolls are expected to come in at 313k in October after contracting 33k in September. As usual, investors will pay a close attention to wage growth with average hourly earnings anticipated to rise 2.7%y/y versus 2.9% in September. The release of the September job report will be our best and last shot to get some volatility this week. Unfortunately, the market is more focus on developments on Trump’s Tax plan, as it will have a larger impact on inflation and growth, should it be approved. In addition, investors realized that a stronger job market do not ensure, at all, sustained inflation pressures.
Commodity Currencies lagging oil
Oil prices are looking to break resistance at $55.03 making 2017 new highs. Decline oil stocks and solid growth in demand has overcome weather and geopolitical issues. Brent is now trading above $60brl and futures backwardation has invited deeper buying in the long end of the curve. OPEC has sighted their success in supply restrain pointing to falling inventories. It seem that WTI at $55 is likely to maintain.
However, commodity liked currencies have not following oil prices higher. CAD and NOK have diverged significantly from oil prices in recent weeks. It is not uncommon for decoupling but the divergence rarely is for an extended period. The rationale is the convergence of higher oil at the same time US rates have risen, which reduced the sensitivity to external influenced. With US yields stabilizing we would watch for CAD and NOK to catch up to higher oil.
Chine Gold consumption increases while output declines
Price of gold remains above $1270. Since the start of the year, we recall that gold has gained almost 6% underlining global uncertainties. It is important to assess gold’s potential by looking at China as a significant part of the market takes place in China. The Chinese consumption has increased in the first 3 quarters of this year of 15.49% y/y. This increase has happened against the backdrop of the stock market recovery. Indeed Chinese stocks took a big hit in 2015.
In China, the gold output has strongly declined, facing a 3.76% decline since the start of the year. On top of that Chinese regulations are also stricter, in particular regarding the waste from gold mining. Chinese authorities have considered that the environmental impact of producing gold has overcome the proceeds from the sale.
In our view, we also believe that levels of production cannot be sustainable over the long haul. The reserves are falling and then the production should keep on declining. We consider that it is likely that the gold price should head higher within the next few month to reflect those data.
