Dollar Index and yields
The weakening Dollar Index, driven by increasing Fed rate cut expectations and a healthy risk appetite, saw a surge on Friday following a solid US nonfarm payroll report. The Index closed with a 0.70% gain at 104.93 on Friday and a weekly gain of 0.25%.
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The 10-year US yields hit 4.271% on Friday, the lowest level since April 1. However, a strong job report led to a sharp increase in US bonds on Friday. The ten-year US yields closed with a 3.28% gain at 4.43%, though they were still down nearly 1.75% for the week. The 10-year yields may test the resistance at 4.50% in the near term, which could be bearish for gold. The 2-year US yields surged over 3% on Friday to close at 4.89%.Data and events round-upThe Bank of Canada and the European Central Bank (ECB) cut rates on Wednesday and Thursday, respectively. The ECB did not provide clear guidance for further rate cuts, likely proceeding on a case-by-case basis.
US data released in the week ending June 7 indicated that the US economy is still performing reasonably well. ISM manufacturing data for May came in below forecast at 48.70, but the ISM employment Index rose back into expansion territory. JOLTs job openings for April fell short of the forecast, as did durable goods orders for April. However, the ISM services Index for May exceeded expectations. US nonfarm payrolls revealed that employers added 272K jobs in May, surpassing the forecast of 180K. The unemployment rate was slightly above forecast at 4%, but average hourly earnings rose above expectations.
Fed rate cut expectationsAfter a strong nonfarm payroll report, traders adjusted their rate cut expectations from July to September.Data and events next weekMajor US data scheduled for next week include CPI and PPI for May, University of Michigan sentiment for May, and inflation expectations. The US Federal Reserve will announce its monetary policy decision on Wednesday, with no change in the Fed fund rate expected.
Market participants will be watching for clues on rate cuts, especially as some major central banks have cut rates and certain US data have been weak. China’s PPI and CPI will also be closely monitored for an indication of the Chinese economy’s strength. European data, such as the UK’s April job report and monthly GDP, as well as Germany’s CPI for May, will be of interest to traders.
China’s Central Bank halts gold buyingRecent data revealed that China’s Central Bank did not purchase any gold last month, ending an 18-month streak of continuous buying. In April, the PBoC bought only 60K ounces of gold, down from 160K ounces in March and 390K ounces in February. Additionally, China’s gold imports in April decreased by around 30% from the March level.
The slowdown in Chinese gold buying appears to be more related to high prices than anything else. It is likely that buying will resume as prices decline. However, this pause, for now, has bearish implications for gold.
ETF
Total known Global gold ETF holdings reached 81.034 Moz as of June 6, marking a six-week high on a weekly basis.
Weekly outlookSpot gold is expected to trade with a bearish bias due to rising yields and China’s gold buying pause. The metal may test key support at $2,277 in the near term, with potential short covering prior to the US FOMC monetary policy decision and CPI data. The next major support level is at $2,250, with resistance at $2,315/$2,330.
Investors are anticipated to continue buying dips for medium to long-term positions as fundamentals remain positive. The delayed rate cut is not cancelled, and central banks continue to buy gold at a healthy pace. The Chinese Central Bank’s buying is expected to resume soon, as prices have significantly dropped from their cycle high. Additionally, the rise in the US unemployment rate and rate cuts by other central banks are supportive of gold.
(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
