Gold rebounded back above the $1,700 mark this past week

Gold rebounded back above the $1,700 mark over the past week, a development that proponents of technical analysis may construe positively considering that the yellow metal has now fended off several attempts to drive it below the $1,680-$1,700 support zone over the past three months. Its recovery was tentative, however, with both firm US Treasury yields and a strong US dollar still acting as headwinds. Over the week to Thursday’s close, gold gained 0.6%, leaving it down 6.7% this year (spot ref.: $1,708).

Ahead of the Federal Reserve’s policy meeting later this month (Sept. 20-21), at which another 75bp rate hike was accorded an 86.0% probability at Thursday’s close per the CME Fed Watch Tool, three other G10 central banks continued to hike rates this week.

First up was the Reserve Bank of Australia on Tuesday lifting its cash rate target 50bp to 2.35%. This was the RBA’s fourth 50bp hike in as many months, following an inaugural 25bp move in May. In its statement, the RBA said it expected inflation “…to increase further over the months ahead”, and that it was paying “…close attention to both the evolution of labour costs and the price-setting behaviour of firms…”, both of those naturally important for the trajectory of inflation generally. As in August, the RBA said it expected to hike further while qualifying that policy “…is not on a pre-set path.” AUDUSD ended the week -1.3%, the Aussie 3y -16bp to 3.22% and 10y -9bp to 3.64%.

The Bank of Canada followed on Wednesday with a 75bp hike in its overnight rate target to 3.25%, a downgrade from the +100bp move in July; the BoC didn’t have a policy meeting in August. This brought cumulative tightening by the BoC since starting in March to 300bp. Similar to the RBA, the BoC in its statement highlighted inflation risks, e.g., “a further broadening of price pressures”, while also hinting at more hikes. USDCAD fell 0.3% over the week while Canada’s 10y bond yield rose 2bp to 3.22%.

Arguably the most important of the three given the size of the Eurozone economy (third largest in the world) and the euro’s role in the foreign exchange market (most traded versus the US dollar), the European Central Bank on Thursday capped things off with 75bp rate hikes across its three policy interest rates: deposit facility to 0.75%, main refi to 1.25%, and marginal lending facility to 1.50%. The deposit rate is now in positive territory for the first time since December 2011. The ECB’s statement forewarned of more rate hikes “over the next several meetings” in order to “…dampen demand and guard against the risk of a persistent upward shift in inflation expectations”, a message President Lagarde emphasized several times at her post-meeting press conference.

Apart from a small upgrade to Eurozone GDP growth this year, to 3.1% from 2.8% in June, the new ECB staff macroeconomic projections painted a rather grim picture. The GDP projection for 2023 was slashed 1.2ppt to just 0.9%, and inflation (HICP) forecasts were ratcheted higher: for 2022 by 1.3ppt to 8.1% and for 2023 by 2.0ppt to 5.5%. A downside scenario based on a worst-case energy-crisis scenario was even darker.

The downbeat economic projections together with President Lagarde’s determined tone to carry on with rate hikes – notwithstanding growth risks – likely explain the euro doing an about-face and weakening anew following a knee-jerk reaction stronger on the rate hikes. EURUSD ended the week -0.6%. Germany’s 10y yield jumped 16bp to 1.73%.

Sterling struggled for another week (GBPUSD -1.0%) even with new UK Prime Minister Truss on Thursday announcing plans to cap energy bills for consumers and businesses in an attempt to stave off cost-of-living and broader economic crises, respectively. While such fiscal initiatives, and likewise in the EU, there ostensibly to be financed to some extent by windfall taxes on energy companies, were welcomed, there is potential risk of debt dynamics going awry if those taxes don’t measure up and/or the energy crisis continues for some time. Deterioration in debt dynamics could be supportive of gold.

The US Dollar Index’s 0.6% weekly advance left it near 20-year highs. The yen dived again (USDJPY +3.7%) amid still-wide US-Japan interest-rate differentials, even with Japan’s finance ministry suggesting growing unease with yen weakness. The Swiss franc, by contrast, gained 0.7% vs. the dollar. The SNB’s next meeting is on Sept. 22.

Oil prices had another down week with the market still buying into the narrative that rate hikes around the world will likely slow growth and, consequently, result in lower demand for crude. Supportive of that narrative were ongoing lockdowns in China, the world’s largest importer of crude oil. Brent and WTI lost about 7% over the week to Thursday’s close. The decision by OPEC+ on Monday to trim production by 100k bpd was seen as a wash with the similar, token 100k production increase announced the month before.

The US’s drawdown of oil from the Strategic Petroleum Reserve is scheduled to end next month. While oil supply from this source has had the desired effect on US gasoline prices (-30.0% since June), it has left SPR storage at its lowest level since late-1984, arguably making further draws untenable. Watch this space – no more SPR supply coupled with OPEC+ production restraint could create a more positive environment for oil prices, which in turn could boost inflation expectations and provide support to gold.

In addition to lockdowns and property-market woes, also casting a pall over China’s growth prospects was August trade data showing exports up just 7.1%, the slowest pace since April, and imports up a mere 0.3%. CNY lost 1.0% vs. USD over the week.

US Treasury yields were mixed and little changed in the week to Thursday’s close. The nominal 2y was down 3bp to 3.48%, 5y flat at 3.39%, and 10y +3bp to 3.29%. The 5y real Treasury yield (TIPS) firmed 6bp to 0.93% and 10y 7bp to 0.88%. Corresponding breakeven inflation rates were down 6bp and 4bp. A speech from Fed Vice Chair Brainard Wednesday and remarks from Chair Powell at the Cato Institute Thursday were hawkish, keeping expectations tilted to a 75bp hike this month. Whether that or a lesser 50bp comes to pass will likely hinge on August CPI due next week (Sept. 13).