Gold took a southerly turn in today’s early trading in response to sharp drop in the Chinese yuan. It is down $6.50 at $1225 following a surge late last week that took it back over the $1230 mark. Silver is down 9¢ at $15.43.
The president’s rhetoric late last week attempting to counter devaluation of the yuan, it would seem, has fallen on deaf ears. The precipitous drop in the yuan continues unabated (see today’s Chart of the Day) with the Peoples Bank of China sending a message of its own: It will stand aside and let the yuan drop on international currency markets.
As reported here last week, China is stepped up a dovish monetary policy, including a stronger dose of quantitative easing, while the Fed chairman over the weekend pledged to stay the course on raising in interest – all to the chagrin of the sitting president of the United States, who appears powerless in the face of it all. None of this has escaped the notice of international currency traders.
Meanwhile, through it all, China continues to import massive amounts of the “barbarous relic” to balance its huge dollar-based reserves. It imported 400 tonnes in the second quarter – about two-thirds of the global mine production. We would add that those imports crossed China’s border at very favorable prices.
Quote of the Day
“The currency should be depreciating from a broad macro perspective – you have the Fed hiking and PBOC easing, so at some point it will be reflected in the FX market. This is still in line with the broader PBOC policy of introducing more volatility and letting the market play itself out.” – Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong (Bloomberg interview)
Chart of the Day
Last week in Myra Saefong’s MarketWatch afternoon gold market update:
“I do not believe that the trade wars at present are the dominant issue for gold and the dollar,” Michael Kosares, founder of gold broker USAGOLD, told MarketWatch. “Both, I believe, are still caught up in a syndrome dictated by dovish interest-rate policy across both oceans, while the U.S. continues to raise rates. That could all change in a heartbeat, though, if the inflation rate begins to run consistently higher than interest rates.”
Reports have surfaced that China’s central bank is aggressively pursuing its own version of a quantitative easing program. (Read here) Simultaneously it fixed the yuan top-shelf exchange rate lower signalling it was interested in a weaker yuan against the dollar and other currencies. The combination sent gold reeling overnight in Asian markets – down $14 at one point. Gold has staged a minor recovery in early U.S. trading and is now down $10 at $1217. Increasingly, currency traders are suggesting that the Fed may be forced to act. In an editorial this morning, the Financial Times warns “The U.S. central bank must be prepared to halt or reverse rates. . . if financial stability is threatened.”