Broker's Notes: Dollar declines; gold heading for its biggest gain since mid-May

Dollar

US economic data disappointed across the board driving the dollar lower and this triggered a wave of sell off in equity markets too. The glaring difference between the US economy and the rest of world has cautioned many investors. Yesterday’s data revealed that US weekly jobless claims rose to a fresh yearly high of 500K versus forecasts of 474K while the Philly Fed reading printed at -7.7 versus 7.2 eyed. This news is quite disappointing for the US and global growth as jobless claims reached the 500K barrier for the first time since November of 2009 indicating that job growth is likely to be very lackluster for the foreseeable future. The overall four week average has now climbed to 482K – its highest level since December - suggesting that this is a structural rather than cyclical issue.

Gold

Given the global economic uncertainty, predominantly in US it’s suffice it to say that at the moment the US dollar is seen as quite “acceptable” for safe-haven purposes, but along with it, so is gold. Now, the fear that the global recovery may be losing steam and that it will bring about a potential bout of deflation is being used as the acknowledged catalyst for higher bullion prices. The precious metal is heading for its biggest 3-week gain since mid-May. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust said its holdings rose to 1,299.468 tonnes by Aug. 19 from 1,295.516 tonnes on Aug. 18. The holdings hit a record at 1,320.436 tonnes on June 29.

Euro

Euro continues to be pressured by sovereign debt concerns in Greece and the increasingly disappointing performance of the US economy has started to become a bigger concern for the currency market as the summer comes to a close. The dollar index, gauge of its performance against a basket of six major currencies, inched up 0.1 percent to 82.532. With little or no data of significance, today’s trade is likely to be range bound.

UK sterling

Sterling rallied yesterday after UK Retails Sales printed much stronger than expected figures. UK Retail sales jumped 1.1% versus 0.4% forecast – their best gain in 5 months – after recording a strong increase in other stores sector which included World Cup paraphernalia and jewelry. However gains were short lived as the investors were more focussed on the headwinds facing the UK economy as fiscal austerity measures begin to come into effect in the fall.

Yen/Dollar

Against the Japanese currency, the greenback fell on Thursday towards a 15-year low of 84.72 yen, while two-year US Treasury yields hit an all-time low. The dollar/yen rate has a high correlation with US and Japanese government bond yield spreads, which are now narrowing. The Bank of Japan may consider easing monetary policy next month and is lining up its options, but is in no mood to act in the near term. But there has been persistent speculation that the yen's strength may nudge it to act before its September rate review, or even before a meeting between Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa expected next week. There is a speculation that the BOJ will tweak its new fund supply operation introduced last December or buy more Japanese government bonds.

Oil

Crude oil traded near a six-week low as rising US jobless claims and a contraction in manufacturing added to concern growth in the world’s biggest oil-consuming nation is slowing. Earlier in the week, Energy Department data showed that total US petroleum inventories reached the highest in at least 20 years.

Source: Richcomm Global, Dubai; www.richcommglobal.com