The Daily Market Report: Gold Surges to 3-Week Highs As Currency War Heats Up
11-Aug (USAGOLD) — Gold initially fell in reaction to China’s devaluation of the yuan, as the dollar firmed on the news. However, both gold and the dollar reversed course as China’s move may have been the final nail in the coffin of a Fed rate hike this year.
The yellow metal initially dipped to 1093.70 as the greenback rallied, but after further consideration, gold rebounded smartly to set a 3-week high at 1119.42. That’s an impressive intraday swing of more than $25.
The PBoC announced a surprise one-time devaluation of the yuan. Given the trade balance between China and the U.S., this was a dollar positive event. However, the market rather quickly recognized that the bullish implications for the dollar in the yuan devaluation likely takes the Fed rate hike off the table.
When there is a big shot fired in the currency war, I invariably turn to Jim Rickards, author of Currency Wars. Rickards was quick to react, saying via Twitter that “King Dollar is the only strong currency left. That should kill the Fed Sept rate hike.”
.@robbieleichter Pushing the #SDR decision back nine months was playing rough with China, so they decided to play rough with us. All's fair.
— Jim Rickards (@JamesGRickards) August 11, 2015
The strong dollar has unquestionably been a headwind to the U.S. economic recovery. The last thing the Fed wants is to intensify that headwind by launching a tightening campaign at this point.
That is especially true if the Chinese devaluation was not really a one-time event. Bill Gross of Janus says we should keep an eye on the official yuan peg moving forward. If they start ratcheting the peg lower, it may signal that the devaluation was the beginning of a weaker yuan campaign.
Gross: Tonight's Chinese Yuan official "setting" is critical. If weaker, then last night was just the start.
— Janus Capital (@JanusCapital) August 11, 2015
If the devaluation wasn’t enough, today’s U.S. data was generally disappointing. Productivity in Q2 rebounded less than expected. While unit labor costs (ULC) edged higher, the trend remains generally weak. Real compensation was down -1.1%.
Wholesale sales were +0.1% in June, on expectations of +0.5%. Wholesale inventories rose another 0.9%, which suggests negative revisions to Q3 GDP are likely in the offing. Arguably the negative risk for tomorrow’s retail sales report has risen as well.
We noted in yesterday’s DMR that the shorts in the paper market were probably getting a little twitchy. The upside extension today only heightens the risk of a short-squeeze.
