Foreign Exchange & Commodities (October 2017)
Headwinds For Gold

“The safe-haven appeal of gold, coupled with the maturing US Dollar cycle may not be enough to keep gold supported as more developed market central banks join the Fed in leaning toward tighter monetary policy.”

Michael Lai, Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad; Member of OCBC Wealth Panel

Key Points:

  • The newfound love for gold may increasingly be challenged by the gradually changing market backdrop of rising global rates. First, the September Federal Open Market Committee meeting revealed a steady consensus around a December rate hike. Going forward, downside U.S. inflation surprises are likely behind us and normalising inflation is set to drive U.S. rates higher.
  • Second, and more importantly, tightening policy seems to be back in fashion and it is not only about the Fed. Many central banks in advanced countries have swung to a more hawkish stance, likely encouraged by more the solid tone to global growth and stronger equities. The most important change in policy is likely to come from the European Central Bank in October.
  • Over the medium-term, as global rates start to inch up further, we expect gold to rebase lower.
  • Concerns about geopolitical events disrupting supply have given a boost to oil prices, but this is likely to be short-lived. U.S. shale drilling has leveled off in recent weeks, but activity would soon step up if higher prices create the right incentives. Demand growth is solid, but not picking up to any meaningful degree.
  • After the bottoming out in September, the question is will the U.S. Dollar finally turn the corner by strengthening in 4Q2017, after its year-to-date slide? We think this will have to be predicated by a sustained breach of key technical levels across a range of asset prices, including U.S. Dollar index (DXY), 10-year U.S. Treasury yields and Bund yields.
  • As we step into October, the greenback may retain the upper hand against the Euro (political and European Central Bank uncertainty), the Australian Dollar, the Canadian Dollar and the Japanese yen (still sufficiently dovish central bank plus political uncertainty). The Pound (Brexit overhang) and the New Zealand Dollar (political uncertainty, sufficiently dovish RBNZ) could also lose some of their shine against the greenback.
  • Looking further ahead, we think that the Fed is not the only central bank that could tighten policy in the coming months. Given the Fed’s relative confidence of its prognosis in September, other major global central banks may also turn less dovish or even more hawkish. This shifting relative central bank dynamics may eventually hurt the U.S. Dollar.
  • The nominal effective exchange rate (NEER) has continued to persist in the upper half of its perceived fluctuation band, although excessive Singapore Dollar outperformance remains in check.
  • To this end, we look for Singapore Dollar outperformance against the Euro, Australian Dollar, and the Canadian Dollar, while the Singapore Dollar may lag the Pound as the BOE surprises with its hawkish stance again. Elsewhere, we expect the Singapore Dollar to be range bound against the New Zealand Dollar.
OCBC MoneyMonday™