Gold traded above the $1300 in early trading, establishing a new 5-month high at 1305.34, before correcting modestly. The yellow metal continues to garner support from a global shift toward easier monetary policy that seems to be gaining momentum.
Word leaked today that the ECB is contemplating QE of €50 bln a month for at least a year. That €600 bln minimum total is 20% more than the market consensus of €500 bln. But as a Wall Street Journal article on the topic suggests, it could be “much more.”
The Bank of Canada announced a surprise 25 bps rate cut this morning, dropping their benchmark overnight lending rate to 0.75%. The plunge in oil prices is already negatively impacting the Canadian economy, reducing export revenue and energy sector investment, which is resulting in layoffs. “The drop in oil prices is unambiguously negative for the Canadian economy,” said BoC governor Stephen Poloz.
Today’s release of the minutes from the Bank of England’s January MPC meeting reveal a decidedly more dovish tone. The vote to hold rates steady at 0.5% was unanimous; meaning that hawks, McCafferty and Weale, had dropped their dissent and calls for tightening.
Last week, the Reserve Bank of India did a surprise rate cut, in advance of their February policy meeting. The RBI is attempting to reinvigorate a flagging economy and believes the drop in energy prices has reduced the inflation risk, giving them the leeway to ease.
Of course the big policy news from last week was the SNB’s abandonment of the franc’s ceiling against the euro. They also cut rates, deeper into negative territory in an effort to staunch inflows into the franc.
On Monday, the Danish central bank cut its deposit rate to -0.2%, from -0.05%. Nationalbank also reaffirmed its commitment to the krone’s peg against the euro. Your safe-haven flows are not welcome in Denmark either.
Meanwhile, we are to believe that the Fed is moving toward a rate hike? The Treasury market doesn’t seem to believe it, as we’ve seen yields come down sharply in recent weeks.
Typically, the prospects of ever-easier monetary policy and liquidity, would hearten stock market investors. However, I think they may finally be catching on that the swing away from policy normalization is reflective of mounting growth and price risks.
U.S. stock market belwether Johnson & Johnson reported this week that they were basically getting killed by the stronger dollar. The company’s international sales fell about 7% in Q4 as the dollar rose.
“Currency headwinds have increased quite substantially,” Chief Financial Officer Dominic Caruso said in a conference call. Last year, he said, the dollar grew stronger “to a greater extent than we had anticipated.” He said the company expects another 3.5% to 4.5% of negative foreign-exchange impact this year if the dollar remains at its current high levels. — via The Wall Street Journal
A big multinational like J&J hedges their currency exposure, so things could have been much worse, given that the greenback rose more than 14% against a basket of currencies last year. However, there are certainly companies that sell overseas and don’t hedge at all.
It seems terribly unlikely that the Fed will tighten, when the rest of the world’s central banks are moving in the absolute opposite direction. The most hawkish scenario in my mind is that they hold pat. However, one has to wonder if the Fed might launch a counter-offensive in the global currency war in order to provide some relief to U.S. exporters.
If that were to happen, it would mark a severe escalation of the currency wars with everyone debasing their currencies in a beggar-thy-neigbor race to the bottom. The implications for the gold market would be very bullish indeed.