What does the gold price surge tell us about the US dollar?
The US dollar fell against all G10 currencies in July, in an orderly decline. More dramatic have been the surges in gold, up 10% in July including record highs and silver, which jumped by as much as one third.
Gold’s surge has sparked plenty of attention, including claims that its rally was being driven by safe haven demand linked to US-China tensions. This is unconvincing, given equity volatility benchmark VIX slipping to lows since February and global equity prices hovering near 5 month highs.
Instead, it is hard to escape the correlation since late March between equities, gold and a weaker US dollar. The trend in each of these is consistent with the Federal Reserve’s aggressive monetary easing stance, both the actions already taken and the willingness to do more.
Fed Chair Jay Powell reinforced such expectations at this week’s FOMC meeting. While making no policy changes, the Fed expressed concern over the economic impact of the rebound in coronavirus cases in many US states.
The Fed has plenty of flexibility to increase the pace of its bond purchases and at its next meeting in September, it may adjust its policy guidance to commit to very low interest rates until inflation is at least above 2%. Underlying inflation is currently only about 1%.
Of course all major central banks have taken radical steps to try to cushion the economic blow of the pandemic. But after years of US growth outperformance and accompanying higher yields, the faltering US economy could be a persistent weight on the dollar. This week the yield on the 10 year US treasury bond fell to 0.55%, a low since the March panic.
Taking the long view, the US dollar is not especially weak. In trade-weighted terms it remains about 30% above the 2011 lows when the Fed was conducting its post-GFC bond-buying program known as QE2.
At that time, the Aussie dollar was above parity with the US dollar, so the Aussie’s recent rally needs to be kept in context. Still, it has been another week of solid gains for the currency, reaching the 72 cent mark for the first time since April 2019.
With the US dollar under pressure and both gold and iron ore prices strong, the Aussie’s rise against the greenback is understandable. But the Aussie is softer on a range of cross rates, which fits the deteriorating domestic economy.
Victoria’s coronavirus second wave has been building for weeks but there is no positive spin on the daily record 723 new cases announced on Thursday. NSW daily numbers are in the teens but increasingly widely dispersed across Sydney.
As a result, Queensland suddenly announced a ban on all visitors from Sydney, a further setback for the national economy. The Australian Treasury is already warning that last week’s economic forecasts may be too optimistic and given that huge fiscal support is set to be unwound rapidly from Q4, there is plenty of cause for concern.
This gives the RBA plenty to ponder at Tuesday’s meeting but judging by Governor Lowe’s recent comments, they are reluctant to take any further steps near term.
Also on the calendar in the week ahead we will
see June data on Australia’s trade balance, retail sales and housing loans. But
it will be hard to ignore the daily Covid-19 updates, especially from Victoria.
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Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.