Gold Rises as Yield Differentials Send USD Lower

ONG Focus | Insights | Written by Oil N' Gold | Tue Nov 02 10 07:16 ET

Commodities traded with a firm tone in European sessions as USD plunged against major currencies, with Japanese yen and British pound being exceptions. Rate hikes by central banks in Australia and India, ahead of the FOMC meeting, have widened interest rate differentials between these countries' currencies and the dollar. Precious metals remained strong with gold approaching 1360 and silver staying at elevated level after spiking to a new 30-year high of 25.055 yesterday. WTI crude oil is expected to rise for a second consecutive day with fuel prices trading with a similar pattern.

The RBA hiked the cash rate, by +25 bps, to 4.75% for the first time after a 6-month pause. Policymakers believe inflation will rise over the next few years as moderation of general price levels over the past 2 years is 'now close to ending'. Rally in commodities has given a significant boost to incomes and to investment in the resources sector while the tight job market will probably put upward pressure on wage over coming years.

Meanwhile, the RBI (the Reserve Bank of India) raised the repo and reverse-repo rates by +25bps each to 6.25% and 5.25%, respectively, in order to curb inflation which has been growing at the second fastest pace, after Argentina, in G-20. Policymakers signaled that further tightening in the 'immediate future is relatively low'.

Unexpected rate hikes have widened yield spreads between assets of Australia and India and those in the US, spurring capital flows to the former from the latter. While the dollar has weakened against major currencies today, Japanese yen and British pound were exceptions. JPY fell against USD after surging to a new 15-year high. The market trimmed long-JPY bets amid speculations the BOJ will accelerate easing measures after gauging Fed's action tomorrow. GBP tumbled against USD as PMI construction index surprisingly fell to 51.6 in October from 53.8 a month ago. The BOE will not change its policy stance at Thursday's meeting, though.

The strike in France has come to an end. Yet, it will take a few weeks to bring operations back to normal as labor actions last month have halted operations of 10 refineries. Surveys showed that the country's inventories of gasoil, fuel that includes heating oil and diesel, fell below 53 mmb at the end of October, compared with 5year average of 61.6 mmb. Therefore, the event may continue to support oil prices in the near-term.

 

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