Rally in Oil Prices Resumes as Inventories Drew. USD's Rebound Stalls

ONG Focus | Insights | Written by Oil N' Gold | Wed Nov 10 10 23:54 ET

The dollar's rebound stalled as risk appetite increased after initial jobless claims data dropped -22K to 435K, compared with consensus of 450K, last week. This upstaged sovereign concerns in Ireland and a rise in China's RRR. Treasuries rose after the Fed announced to buy $100B of bonds during the next 30 days and the 30-year bond auction was completed. Fed's plan reminded us of its committed participation in the market. Commodities were pressured initially as the dollar rebounded, loss were pared later in the NY session as US' recovery lost steam. The front-month contract for WTI crude oil jumped to a new 2-year high of 88.21 before settling at 87.81, up 1.26%. An unexpectedly bullish inventory report has helped the rally.

A tug of war between bulls and bears was seen in gold trading. The rally after Fed's QE2 announcement has sent the metal above 1400. While factors such as China's RRR hike, margin changes in silver futures and overextended rally justify a correction in the near-term, persistent currency tensions and sovereign crisis in peripheral European economies should keep gold supported. We expect gold will remain in consolidation these few days.

Investors remained unnerved although Irish central bank Governor Patrick Honohan reassured the country will go back to the bond market next year. Honohan said that the budget plan, including 6B euro in spending cuts and tax increases for 2011, is a 'credibly convergent path' and 'a good basis for rebuilding confidence'. These comments failed to ease market worries and Irish 10-year yields surged to a new high of 8.6% amid expectations that the plan will not be approved. Portuguese bond yields also rose as the likelihood of a bailout by the European Financial Stability Facility has also increased.

Fed's new round of easing has driven capital flows to higher-yield investments in emerging markets. In order to curb excessive liquidity from overseas, China has recently stepped up control measures. Yesterday, the People's Bank of China announced its first national increases in reserve requirement ratio for banks. The percentage of amount lenders have to set aside is increased by 0.5%. The move triggered declines in stocks currencies and commodities.

It's increasingly likely that easing measures from advanced economies will result in protectionism. International disputes regarding trades and currencies should last for a prolonged period of time. We believe the situation is positive for gold for it is a traditional safe haven and a tool for portfolio diversification.

World Bank President Robert Zoellick clarified his comments on gold standard. While Zoellick said he doesn't believe we can return to gold standard, he said 'markets are already using gold as an alternative monetary asset because confidence is low. Policymakers need to consider this as an indicator about how markets are viewing their policies'. We believe his comments help justify recent rally in gold and indicate that the metal's strength should be well-supported as long as world central bankers continue to employ existing monetary policies.

 

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Gold Soars as ECB Policymakers Warn about Currency War. USD Resumes Weakness

ONG Focus | Insights | Written by Oil N' Gold | Fri Oct 29 10 00:39 ET

Expectations of Fed's QE continued to dominate movements of asset prices. While it's almost certain that the Fed will announce new easing measures at the upcoming FOMC meeting, the size and the timing have spurred rigorous debates in recent days. The dollar resumed weakness yesterday as the New York Fed surveyed bond dealers' expectations of asset purchases over the next 6 months. Losses were pared later in the day but mixed economic data failed to depict a clearer outlook for Fed's move. Commodities rebounded as USD fell. The front-month contract for WTI crude oil climbed higher and settled at 82.18, up +0.29% while gold rose strongly to a 3-day high before closing at 1342.5, up +1.50%.

BOJ's decision to bring forward the next meeting to November 4-5 signaled that the Fed will very likely to announce QE2 next week. While the dollar had rebounded amid worries that the program may be smaller than previously expected, renewed selling pressure was seen after a Fed's survey. The New York Fed asked bond dealers about their expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asked companies how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. Questions such as estimated changes in nominal and Treasury yields 'if the purchases were announced and completed over a 6-month period', with amounts ranging from zero, 250B, 500B and 1 trillion induced speculations that the Fed's measures may be aggressive.

On the macro front, indicators showed some improvements in economies developments. However, it fails to provide a better gauge on the Fed's move. Initial jobless claims unexpectedly plunged -21K to 434K in the week ended October 23, bringing the 4-week moving average to 453K, the lowest level in 3 months. Yet, one should caution that the reading might have been distorted by the Columbus Day holiday. Kansas City Fed manufacturing index dipped -4 points to 10 in October but both 'new orders' and 'employment' improved, to +16 and +1 respectively.

Apart from QE2, there are other factors directing gold price. 2 top ECB policymakers warned about the risks of currency wars ECB Governing Council member Mario Draghi said that 'current account imbalances are widening again, free floating currencies are suffering from (government currency interventions), divergent policies and consequent speculative tensions. The global recovery itself is at risk'. His views were shared by Axel Weber who said 'it is a well-known fact that more flexible exchange rate regimes would help redirect growth from export to stronger domestic demand' and 'Market-oriented exchange rates that reflect underlying economic fundamentals contribute to global economic stability'.

Meanwhile, the IMF said emerging economies should appreciate their currencies to ease currency tensions while the dollar is 'on the strong side' relative to US economic performance. In our opinion, there's long way to go before advanced and emerging economies resolve currency tensions and the situation is positive for gold.

Concerning dataflow, US GDP probably grew +2.2% q/q in 3Q10 after a +1.7% expansion in the prior quarter. Chicago PMI is expected to have slipped to 58 in October from 60.4 while University of Michigan Confidence revised up to 68 from 67.9 in October.

 

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Gold Soars as ECB Policymakers Warn about Currency War. USD Resumes Weakness

ONG Focus | Insights | Written by Oil N' Gold | Fri Oct 29 10 00:39 ET

Expectations of Fed's QE continued to dominate movements of asset prices. While it's almost certain that the Fed will announce new easing measures at the upcoming FOMC meeting, the size and the timing have spurred rigorous debates in recent days. The dollar resumed weakness yesterday as the New York Fed surveyed bond dealers' expectations of asset purchases over the next 6 months. Losses were pared later in the day but mixed economic data failed to depict a clearer outlook for Fed's move. Commodities rebounded as USD fell. The front-month contract for WTI crude oil climbed higher and settled at 82.18, up +0.29% while gold rose strongly to a 3-day high before closing at 1342.5, up +1.50%.

BOJ's decision to bring forward the next meeting to November 4-5 signaled that the Fed will very likely to announce QE2 next week. While the dollar had rebounded amid worries that the program may be smaller than previously expected, renewed selling pressure was seen after a Fed's survey. The New York Fed asked bond dealers about their expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asked companies how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. Questions such as estimated changes in nominal and Treasury yields 'if the purchases were announced and completed over a 6-month period', with amounts ranging from zero, 250B, 500B and 1 trillion induced speculations that the Fed's measures may be aggressive.

On the macro front, indicators showed some improvements in economies developments. However, it fails to provide a better gauge on the Fed's move. Initial jobless claims unexpectedly plunged -21K to 434K in the week ended October 23, bringing the 4-week moving average to 453K, the lowest level in 3 months. Yet, one should caution that the reading might have been distorted by the Columbus Day holiday. Kansas City Fed manufacturing index dipped -4 points to 10 in October but both 'new orders' and 'employment' improved, to +16 and +1 respectively.

Apart from QE2, there are other factors directing gold price. 2 top ECB policymakers warned about the risks of currency wars ECB Governing Council member Mario Draghi said that 'current account imbalances are widening again, free floating currencies are suffering from (government currency interventions), divergent policies and consequent speculative tensions. The global recovery itself is at risk'. His views were shared by Axel Weber who said 'it is a well-known fact that more flexible exchange rate regimes would help redirect growth from export to stronger domestic demand' and 'Market-oriented exchange rates that reflect underlying economic fundamentals contribute to global economic stability'.

Meanwhile, the IMF said emerging economies should appreciate their currencies to ease currency tensions while the dollar is 'on the strong side' relative to US economic performance. In our opinion, there's long way to go before advanced and emerging economies resolve currency tensions and the situation is positive for gold.

Concerning dataflow, US GDP probably grew +2.2% q/q in 3Q10 after a +1.7% expansion in the prior quarter. Chicago PMI is expected to have slipped to 58 in October from 60.4 while University of Michigan Confidence revised up to 68 from 67.9 in October.

 

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