Gold is narrowly confined as the dollar remains firm. However, much of what is weighing on the euro, pound and yen is also sapping risk appetite, keeping the yellow metal underpinned ahead of the range low.
Soft economic data out of Europe has raised the specter of an ECB rate cut once again, pushing the EUR-USD rate back below 1.30 recently. Additionally, political uncertainty in the wake of last week’s Italian elections is contributing to risk aversion.
Similarly, weak data out of the UK is weighing heavily on Sterling, which is trading at levels last seen in June 2010. Most notable was last week’s unexpected plunge in February Manufacturing PMI to 47.9, well below market expectations. Further accommodations by the BoE are widely anticipated.
As for Japan, BoJ governor nominee Haruhiko Kuroda indicated during a confirmation hearing on Monday that he would be very aggressive in attempting to end deflation. “It would be natural for the BOJ to buy longer-dated government bonds in huge amounts,” Kuroda said. He seemed impatient to get on with it, worrying that “there’s a risk that these market moves will unwind.”
Presumably he was referring to the recent sharp decline in the yen and rise in the Japanese stock market. “There’s evidence that currencies tend to fall for countries that ease monetary policy on a large scale … But the BOJ’s policy is not targeting currencies,” Kuroda noted according to a Reuters article. Apparently Japanese yen debasement is just an unintentional byproduct of their deflation fighting.
Meanwhile, the Fed’s vice chairman Janet Yellen reiterated her conviction that “highly accommodative monetary policy” remains warranted in a speech this morning at the “I do not see any [costs] that would cause me to advocate a curtailment of our purchase program,” said Yellen in response to concerns expressed within the FOMC recently.
As we noted in commentary last week, David Rosenberg of Gluskin Sheff doesn’t see unemployment dropping to 6.5% until 2018, so he expects the Fed will maintain ?ber-accommodative policy for at least five more years. Saumil Parikh of PIMCO suggests that “we expect the secular real policy rate to average -1% per annum for the next decade, and if there are no major changes to our assumptions beyond that, to actually fall gradually towards -1.25% by 2030.”
Negative real rates until 2030? We are indeed going the way of Japan, potentially queuing up our own series of lost decades.
As Michael Hewson of CMC Markets reminded us in an interview this morning, while gold has been under pressure in dollar terms of late, it has been rising in value over the past 6-8 weeks “against Sterling, against the euro and to a lesser extent against the yen.”
PIMCO’s Bill Gross suggested last week that investors “sell the currencies of serial QE offenders.” Given that the Fed currently has a balance sheet in excess of $3 trillion, which is expected to reach nearly $4 trillion by year-end, the U.S. central bank certainly qualifies as a serial offender. I shudder to think what that balance sheet might look like by 2018, let alone 2030.
