Forex Comment Aug 05

Gold above $2,000, yuan jumps to five-month high

 Metal’s inexorable rise suggests investors predict continued decline of the US dollar 

Gold above $2000, yuan jumps to 5-month high

(ATF) China's central bank, the People's Bank of China (PBoC), set central parity for the yuan (CNY) at 6.9752 to the US dollar on Wednesday morning. It proved quite a bit too low as a forecast of the currency's movement in the course of the trading day.

By 5pm HK time, CNY had jumped to 6.9385, a five-month high.

An hour later, by way of sharp contrast, the US dollar (on the dollar index DXY) hit a more than two-year low of 92.8550.

Gold, which on the inverse track had broken above $2,000 (GC1) overnight, kept its mojo, rising to $2,056.40 by 7pm and is showing no inclination to retrace.

The behaviour of the gold-dollar-yuan triple represents an accurate account of the state of the world as reflected in the economic fortunes of its two largest economies and of investor concerns of where all of this is going.

We are awaiting new unemployment claims from the US on Thursday night and jobs numbers for July on Friday. Given the fact that the second Covid 19 wave is continuing to rage in the US with more than 60,000 new cases and in excess of 1,000 new deaths per day, no early employment improvements and hence no early substantial economic recovery can be expected. 

Deeper and more protracted cash support to the unemployed – merely to provide for basic necessities rather than investment – is inevitable and will further bloat the Fed's balance sheet, further weighing on the dollar.

By contrast, China's PMIs – official and private – forecast that with accelerating economic expansion, no large new debt accumulation is called for; the yuan has no great new weight to carry.

And what do gold futures (GC1) tell us?

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That investors predict continued decline of the US dollar and are concerned in the extreme that the disparity between real US economic performance and equity exuberance will end badly for stock holders.

In two recent Global Value Strategist pieces in Asia Times, my colleague David Goldman and I have recommended to diversify US dollar-asset heavy portfolios by increasing gold holdings and moving into Chinese and Korean tech stocks – not only for upside in market performance but also currency upside.

Might moving into euro-asset equities be another hedge against further US dollar decline?

The euro currently trades at a 28-month high of 1.1843. 

A eurozone composite purchasing managers’ index rose to 54.9 for July, the highest level in more than two years. New orders increased for the first time in five months.

The euro and select euro-denominated assets thus provide another dollar hedge.

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