Forex Comment Aug 11

Goldrush at an end? No, but yuan best bet

No near-term US dollar recovery in sight as the US economy must remain on life support from a growing US Fed balance sheet

Goldrush at an end? No, but yuan best bet
Image: Reuters.

(ATF) Lower numbers of Covid hospitalisations in the US and a Trump hint at lower capital gains taxes lifted US stocks overnight; risk-on sentiment carried over to the Asian trading day and provided, in particular, relief to badly mauled Hong Kong equities (Hang Seng Index +2.11%), and after the Asian close was reinforced by the German ZEW Economic Sentiment indicator for August, which beat expectations by coming out at 71.5 points after July's 59.3.

Such broad-based positive news is never good news for gold investors, who concluded that the world may well last a while longer and took profit on their recently accumulated hoard.

Gold (GC1) was down $36.40 (-1.78%) to $2,003.30 at 6pm HK time, at one point traded as low as $1,991.40, and at least temporarily appeared to have lost its mojo.

No such fate befell the yuan. The PBoC set parity on Tuesday morning at 6.9711 to the US dollar. By 6pm CNY traded at 6.9458 and on its current trajectory could soon test the recent – March 4 – high of 6.9260.

This would signal that the yuan is back to pre-Covid strength and trading in line with a near-complete economic recovery. Only central bank concern that a stronger yuan could impart deeper factory gate deflation to the economy and curtail investment could put a break on the yuan's rise.

I don't see that coming. Deflation is receding as yesterday's July PPI numbers of -2.4% year-on-year from June's -3.0% showed.

I stick to my near-term forecast of CNY in the 6.95 - 7.00 range. This will encourage foreign investors in Chinese securities and add to yuan demand, the necessary precondition for further CNY rise.

The US dollar (on the DXY), meanwhile, is stuck in the same rut and, at 93.3070, trades at April 2018 lows.

I see no near-term US dollar recovery in sight as the US economy must remain on life support from a growing US Fed balance sheet that will add at least US$2.5 trillion to the current $7 trillion by year-end 2020.

As the dollar decline continues, gold will remain on the march to $2,500 by Christmas.