How Do You Get Inflation Under Control?

With the USD Index and U.S. Treasury yields the main fundamental drivers of the PMs’ performance, some confusion has arisen due to their parallel and divergent moves. For example, sometimes the USD Index rises while U.S. Treasury yields fall, or vice-versa, and sometimes the pair move higher/lower in unison. However, it’s important to remember that different economic environments have different impacts on the USD Index and U.S. Treasury yields.

To explain, the USD Index benefits from both the safe-haven bid (stock market volatility) and economic outperformance relative to its FX peers. Conversely, U.S. Treasury yields only benefit from the latter. Thus, when economic risks intensify (like what we witnessed with Evergrande on Sep. 20), the USD Index often rallies while U.S. Treasury yields often fall. Thus, the economic climate is often the fundamental determinant of the pairs’ future paths.

For context, I wrote on Apr.16:

The PMs suffer during three of four possible scenarios:

  1. When the bond market and the stock market price in risk, it’s bearish for the PMs
  2. When the bond market and the stock market don’t price in risk, it’s bearish for the PMs
  3. When the bond market doesn’t price in risk, but the stock market does, it’s bearish for the PMs
  4. When the bond market prices in risk and the stock market doesn’t, it’s bullish for the PMs

Regarding scenario #1, when the bond market and the stock market price in risk (economic stress), the USD Index often rallies and its strong negative correlation with the PMs upends their performance. Regarding scenario #2, when the bond market and the stock market don’t price in risk, U.S. economic strength supports a stronger U.S. dollar and rising U.S, Treasury yields reduce the fundamental attractiveness of gold. For context, the PMs are non-yielding assets, and when interest rates rise, bonds become more attractive relative to gold (for some investors).

Regarding scenario #3, when the stock market suffers and U.S. Treasury yields are indifferent, the usual uptick in the USD Index is a bearish development for the PMs (for the same reasons outlined in scenario #1). Regarding scenario #4, when the bond market prices in risk (lower yields) and the stock market doesn’t, inflation-adjusted (real) interest rates often decline, and risk-on sentiment can hurt the USD Index. As a result, the cocktail often uplifts the PMs due to lower real interest rates and a weaker U.S. dollar.

The bottom line? The USD Index and U.S. Treasury yields can move in the same direction or forge different paths. However, while a stock market crash is likely the most bearish fundamental outcome that could confront the PMs, scenario #2 is next in line. While it may (or may not) seem counterintuitive, a strong U.S. economy is bearish for the PMs. When U.S. economic strength provides a fundamental thesis for both the USD Index and U.S. Treasury yields to rise (along with real interest rates), the double-edged sword often leaves gold and silver with deep lacerations.

In the meantime, though, with investors eagerly awaiting the Fed’s monetary policy decision today, QE is already dying a slow death. Case in point: not only has the USD Index recaptured 93 and surged above the neckline of its inverse (bullish) head & shoulders pattern, but the greenback’s fundamentals remain robust. With 78 counterparties draining more than $1.240 trillion out of the U.S. financial system on Sep. 21, the Fed’s daily reverse repurchase agreements hit another all-time high.

Please see below:

Graphical user interfaceDescription automatically generatedSource: New York Fed

To explain, a reverse repurchase agreement (repo) occurs when an institution offloads cash to the Fed in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the Fed at an alarming rate. And while I’ve been warning for months that the activity is the fundamental equivalent of a taper – due to the lower supply of U.S. dollars (which is bullish for the USD Index) – the psychological effect is not the same. However, as we await a formal taper announcement from the Fed, the U.S. dollar’s fundamental foundation remains quite strong.

Furthermore, with the Wall Street Journal (WSJ) publishing a rather cryptic article on Sep. 10 titled “Fed Officials Prepare for November Reduction in Bond Buying,” messaging from the central bank’s unofficial mouthpiece implies that something is brewing. And while the Delta variant and Evergrande provide the Fed with an excuse to elongate its taper timeline, surging inflation has the Fed increasingly handcuffed.

As a result, Goldman Sachs Chief U.S. Economist David Mericle expects the Fed to provide “advance notice” today and set the stage for an official taper announcement in November. He wrote:

While the start date now appears set, the pace of tapering is an open question. Our standing forecast is that the FOMC will taper at a pace of $15bn per meeting, split between $10bn in UST and $5bn in MBS, ending in September 2022. But a number of FOMC participants have called instead for a faster pace that would end by mid-2022, and we now see $15bn per meeting vs. $15bn per month as a close call.”

On top of that, with stagflation bubbling beneath the surface, another hawkish shift could materialize.

To explain, I wrote on Jun. 17:

On Apr. 30, I warned that Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), was materially behind the inflation curve.

I wrote:

With Powell changing his tune from not seeing any “unwelcome” inflation on Jan. 14 to “we are likely to see upward pressure on prices, but [it] will be temporary” on Apr. 28, can you guess where this story is headed next?

And with the Fed Chair revealing on Jun. 16 what many of us already knew, he conceded:

TextDescription automatically generatedSource: CNBC

Moreover, while Powell added that “our expectation is these high inflation readings now will abate,” he also conceded that “you can think of this meeting that we had as the ‘talking about talking about’ [tapering] meeting, if you’d like.”

However, because actions speak louder than words, notice the monumental shift below?

TableDescription automatically generatedSource: U.S. Fed

To explain, if you analyze the red box, you can see that the Fed increased its 2021 Personal Consumption Expenditures (PCE) Index projection from a 2.4% year-over-year (YoY) rise to a 3.4% YoY rise. But even more revealing, the original projection was made only three months ago. Thus, the about face screams of inflationary anxiety.

What’s more, I highlighted on Aug. 5 that the hawkish upward revision increased investors’ fears of a faster rate-hike cycle and contributed to the rise in the USD Index and the fall in the GDXJ ETF (our short position).

Please see below:

Chart, line chart, histogramDescription automatically generated

And why is all of this so important? Well, with Mericle expecting the Fed to increase its 2021 PCE Index projection from 3.4% to 4.3% today (the red box below), if the Fed’s message shifts from we’re adamant that inflation is “transitory” to “suddenly, we’re not so sure,” a re-enactment of the June FOMC meeting could uplift the USD Index and upend the PMs once again. For context, the FOMC’s July meeting did not include a summary of its economic projections and today’s ‘dot plot’ will provide the most important clues.

Please see below:

TableDescription automatically generated

Finally, with CNBC proclaiming on Sep. 21 that the Fed is “widely expected to indicate it is getting ready to announce it will start paring back its $120 billion in monthly purchases of Treasuries and mortgage-backed securities,” even the financial media expects some form of “advance notice.”

A picture containing text, bottle, darkDescription automatically generatedSource: CNBC

The bottom line? While the Delta variant and Evergrande have provided the Fed with dovish cover, neither addresses the underlying problem. With inflation surging and the Fed’s 2% annual target looking more and more like wishful thinking, reducing its bond-buying program, increasing the value of the U.S. dollar, and decreasing commodity prices is the only way to get inflation under control. In absence, the Producer Price Index (PPI) will likely continue its upward momentum and the cost-push inflationary spiral will likely continue as well.

In conclusion, the gold miners underperformed gold once again on Sep. 21 and the relative weakness is profoundly bearish. Moreover, while the USD Index was roughly flat, Treasury yields rallied across the curve. And while Powell will do his best to thread the dovish needle today, he’s stuck between a rock and a hard place: if he talks down the U.S. dollar (like he normally does), commodity prices will likely rise, and inflation will likely remain elevated. If he acknowledges reality and prioritizes controlling inflation, the U.S. dollar will likely surge, and the general stock market should suffer. As a result, with the conundrum poised to come to a head over the next few months (maybe even today), the PMs are caught in the crossfire and lower lows will likely materialize over the medium term.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

USD/CAD: Loonie Gains After Trudeau Wins Third Term; FOMC in Focus

The Canadian dollar snapped its three-day losing streak against its U.S. counterpart on Tuesday after Trudeau was re-elected to a third term in a snap election but wasn’t able to gain a majority.

The USD/CAD pair fell to 1.2738 today, down from Monday’s close of 1.2825. The Canadian dollar lost over 1.2% last month and further depreciated over 1.7% so far this month.

Having failed to win a majority in Monday’s parliamentary elections, Justin Trudeau admitted he must work with other parties. This again leaves him dependent on opposition lawmakers to govern. Early this month, in the event of a Liberal victory in the federal election, Trudeau’s party pledged CAD78 billion in new health investments over five years.

“Increasing concerns about the persistence of domestic elevated inflation and prospect of BoC’s goal of absorbing around 350k job gains insight could see the BoC start to consider signalling rate rises as early as by H1’2022. Together with Citi’s expectations for Brent crude to trade higher in Q4 (USD75-80), this could make CAD the “buy of the quarter in Q4” vs USD, EUR, JPY, CHF. USDCAD is struggling to break below strong support at 1.2555-79. A decisive break below this range is needed to open up for extended losses towards the double lows from Jul’21 at 1.2422-28,” noted analysts at Citi.

Canada is the world’s fourth-largest exporter of oil, which edge lower as production in the Gulf of Mexico slowly returns. U.S. West Texas Intermediate (WTI) crude futures were trading 0.24% lower at $70.12 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“As we have noted over the recent past, the underlying USD trend has been tilting more bullish, despite the block on USD progress in the 1.2750/60 zone last week. The rapid USD advance over the past three days (including today) does look a little stretched in the short run and we do not exclude the risk of some USD back and filing in the near-term on account of that, the more so as the USD has already traded well off its early Monday high,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“But we think solid, bullish USD trend momentum—DMI oscillators are aligned positively for the USD across the intraday, daily and weekly charts—points to limited scope for USD counter-trend corrections (low/mid 1.27s) and ongoing upside pressure on the USD towards 1.2950; gains through the low 1.30s would point to additional scope for gains towards 1.33 in the next few weeks.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.06% lower at 93.219. The dollar reached a one-month high on Monday, boosted by recent strong economic data and speculation regarding Fed tapering. Fed policymakers will meet today and tomorrow and would open discussions about reducing their monthly bond purchases are expected.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Czech Central Banker Holub ‘quite likely’ to Support 50 bp Hike in Sept, Open to More

Speaking to Reuters in an interview conducted on Monday, Holub struck an overall hawkish tone, also saying the debate on whether to move by 25 or 50 bps could be repeated in November. The central bank last raised its main rate by more than 25 basis points in December 1997.

The Czech National Bank raised its main two-week repo rate by 25 basis points in June and then by another 25 basis points in August, taking the rate to 0.75%.

Holub said monetary tightening would likely continue into 2022, a view reinforced by last month’s sharp spike in inflation and signs of further price pressures ahead.

Central Europe has been grappling with stronger inflationary pressures than some other European countries. Economies in the region have faced tight labour markets and solid post-pandemic demand as well as external factors like rising energy costs and global supply crunches.

Holub said he had already considered voting for a 50 basis point increase last month and would likely support the bigger move at the September meeting, noting that inflation overshot the central bank’s forecast significantly in both July and August.

“For me, it has quite visibly tilted towards not only the need to continue with rate hikes at each following meeting, but also the need to insert some stronger step,” Holub said.

“It is quite likely that I will lean towards that already now, in September,” he said.

Headline inflation accelerated to 4.1% year-on-year in August, its highest since 2008. It was also a full percentage point above the central bank’s forecast and double its official 2% target.

Producer prices (PPI) rose by 9.3% year-on-year in August, the fastest growth since April 1993.

MAJORITY FORMING

One board member had voted for a 50 basis point hike at the last two meetings and at least two others signalled their openness for a 50 basis point move.

Holub said he expected the debate on the size of a hike to continue at the November meeting, adding he was “open” to the possibility of another 50 basis point increase then.

“If the new (staff forecast due in November) shows the need to make one more stronger step, then I will be certainly open to such a debate,” Holub said.

“The rates are still low nominally, and even lower in real terms, so from my perspective probably even the debate at the November meeting can be more about a quarter or a half (percentage point move),” he said.

Several central banks around the world have embarked on a monetary tightening path as their economies rebounded from the COVID-19 pandemic, including those in Hungary, Iceland or South Korea. A Reuters poll showed Norway’s central bank would likely join that camp with a rate hike on Sept. 23.

Financial markets are expecting the Czech repo rate to rise by around 100 basis points by the end of the year, forward contracts showed. Holub said such bets were “not irrational”.

“I think the market has basically understood the situation adequately,” he said.

There are three more policy meetings scheduled this year, including the one due to take place on Sept. 30.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Robert Muller; Editing by Ana Nicolaci da Costa)

Gas Price Surge, Just One More Headwind for World Economy

The gas market chaos, which has driven prices 280% higher in Europe this year and led to a 100%-plus surge in the United States, is being blamed on a range of factors from low storage levels to carbon prices to reduced Russian supplies.

So high are tensions that several European Parliament lawmakers have demanded an investigation into what they said could be market manipulation by Russia’s Gazprom.

Whatever the causes, the surge carries major market implications:

1/GROWTH

Analysts say it’s too early to downgrade economic growth forecasts but a hit to economic activity looks inevitable.

Morgan Stanley reckons the impact in the United States, the world’s biggest economy, should be small. While over a third of U.S. energy consumption in 2020 was supplied by natural gas, users were predominantly industrial, it notes.

Overall though, higher gas prices raise the risk of stagflation – high inflation, low growth.

“It is quite clear there is a growing sense of unease about the economic outlook as a growing number of companies look ahead to the prospect of rising costs,” said Michael Hewson, chief market analyst at CMC Markets.

2/INFLATION

Euro zone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by COVID-related supply bottlenecks. In Germany, 310,000 households face an 11.5% increase in gas bills, data showed on Monday.

Noting German factory gate prices were already the highest since 1974, Citi analysts predicted 5% hikes for electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.

Higher food costs are another side effect, given a shortage of carbon dioxide which is used in slaughterhouses and to prolong the shelf-life of food. Cuts in fertiliser production could also lift food prices.

Goldman Sachs predicts higher oil demand, with a $5 per barrel upside risk to its fourth-quarter 2021 Brent price forecast of $80 a barrel. Brent is trading at about $74 currently. [O/R]

3/CENTRAL BANKS

Central banks are sticking with the line that the spike in inflation is temporary — European Central Bank board member Isabel Schnabel said on Monday she was happy with the broad-based rise in inflation.

But as market- and consumer-based measures of inflation expectations rise, gas prices will be on central banks’ radar.

“If we have higher inflation, transitory or structural, and have slower growth – it will be a very tricky situation for markets and central banks to assess, navigate and communicate,” said Piet Haines Christiansen, chief strategist at Danske Bank.

This week’s central bank meetings could test policymakers’ resolve. The Bank of England meeting on Thursday is in particular focus, given UK inflation has just hit a nine-year high.

With UK producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices higher up and job vacancies tipping 1 million, there is a growing chance that higher prices will stick around for longer, said Susannah Streeter, senior analyst at Hargreaves Lansdown.

“If they do, more (BoE) members may move quickly to vote for a rate rise sooner than expected next year, but it would be an unpopular course of action with looming tax rises already hard to digest for many consumers,” she said.

4/ STATE BAILOUTS

Britain is considering offering state-backed loans to energy firms after big suppliers requested support to cover the cost of taking on customers from companies that went bust under the impact of gas prices. One firm, Bulb, is reportedly seeking a bailout.

France meanwhile plans one-off 100 euro ($118) payments to millions of households to help with energy bills.

“The story emerging from the UK energy sector will soon be more relevant to the European market than Evergrande,” said Althea Spinozzi, senior fixed income Strategist at Saxo Bank.

And in a week packed with central bank meetings, she added that markets were “right to fret.”

5/COMPANIES

Spain shocked the utility sector last week by redirecting billions of euros in energy companies’ profits to consumers and capping increases in gas prices. Revenue hits at Iberdrola and Endesa were estimated by RBC at one billion euros and shares in the companies sold off heavily.

Since the move, investors have fretted about contagion to other countries, Morgan Stanley said. While seeing those fears as overdone, the bank acknowledged there was a risk of margin squeezes at European utilities in coming months.

Sector shares are down for the third week straight.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Dhara Ranasinghe; graphics by Saikat Chatterjee and Dhara Ranasinghe; additional reporting by Yoruk Bahceli and Sujata Rao; Editing by Sujata Rao and Hugh Lawson)

Evergrande Nerves Weigh on Offshore Yuan, Dollar Edges Up on Safety Bid

Market sentiment has been rattled by the potential contagion from Evergrande, which is trying to raise funds to pay a host of lenders, suppliers and investors. A deadline for an $83.5 million interest payment on one of its bonds is due on Thursday, and the company has $305 billion in liabilities.

On Thursday, the yuan strengthened to its highest level in three months at 6.4226 per dollar before starting to reverse as Evergrande’s woes worsened. The move sharpened on Monday after warnings from Chinese regulators that the company’s insolvency could fuel broader risks in the country’s financial system if not stabilized.

Analysts at Wells Fargo said on Monday they expect the dollar to reach 6.60 per yuan within the next month. The offshore Chinese yuan last weakened versus the greenback at 6.4839 per dollar.

“We are seeing a classic flight to safety in the dollar until we get some sense of clarity on whether or not it is going to be an orderly or disorderly resolution to Evergrande,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.

“We were likely to see a continuation of the decline we’ve seen in risk assets going into this week and you throw in Evergrande and it has really unsettled the markets.”

The dollar and other safe-haven currencies such as the yen and Swiss franc gained with the risk-off sentiment, which saw Wall Street’s S&P 500 index on pace for its biggest one-day percentage drop 11 months.

The dollar index rose 0.025%, with the euro unchanged at $1.1725.

The dollar has also been gaining ground on expectations the Federal Reserve will begin reducing its monthly bond purchases this year, with the central bank’s policy announcement due on Wednesday.

Aside from the Fed, multiple central banks around the globe will hold policy meetings this week, including those of Sweden, England, and Norway.

The Japanese yen strengthened 0.58% versus the greenback at 109.32 per dollar, while sterling was last trading at $1.3656, down 0.63% on the day.

The Canadian dollar, also a commodity currency that correlates with risk sentiment, weakened to as low as C$1.2895 per dollar, its lowest level in four weeks. It last fell 0.42% versus the greenback at C$1.28 per dollar.

Polling for Monday’s national election in Canada points to an advantage for incumbent Prime Minister Justin Trudeau, but he is unlikely to gain a parliamentary majority.

In cryptocurrencies, bitcoin last fell 7.76% to $43,577.67.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Chuck Mikolajczak; Editing by Bernadette Baum and Cynthia Osterman)

USD/CAD: Loonie Hits Over One-Month Low on Subdued Oil Prices, Election Uncertainties

The Canadian dollar hit over a one-month low against its U.S. counterpart, sliding for the third straight day on Monday as falling energy prices and snap election uncertainties weighed on the commodity currency.

The USD/CAD pair rose to 1.2895 today, up from Friday’s close of 1.2766. The Canadian dollar lost over 1.2% last month and further depreciated over 1.5% so far this month.

Today’s federal reserve decision and the election in Canada will be closely watched by investors. There is no sign of a majority in the Canadian election on Monday, a second time in a row, leaving either Justin Trudeau or Erin O’Toole trying to govern with a minority.

Investors are concerned that elections will lead to a deadlock that hinders government action against COVID-19 and impedes the recovery of the economy.

“What we think will matter the most from a market perspective is whether there will eventually be a workable majority. Up until some majority emerges, the Canadian dollar may continue to discount political uncertainty,” noted Francesco Pesole, FX Strategist at ING.

“At the same time, barring the worst-case scenario of a hung parliament and new elections, we still expect a gradual dissipation of political risk in the coming weeks to help CAD close its mis-valuation gap (USD/CAD is 2% overvalued, according to our short-term fair value model) as the loonie may start to benefit more freely from its good fundamentals – and above all, the prospect of more BoC policy normalisation. We still expect USD/CAD to trade below 1.25 in 4Q21.”

Canada is the world’s fourth-largest exporter of oil, which edge lower as production in the Gulf of Mexico slowly returns. U.S. West Texas Intermediate (WTI) crude futures were trading 1.38% lower at $70.99 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

“We don’t think the federal election is weighing on the CAD in any significant way.  In fact, while the CAD has fallen against the USD this week, it has lost less ground than most of its G10 currency peers.  Short-term CAD vols have firmed but remain within this year’s range (1w vol peaked at 9% in February),” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“The election race remains tight, and another minority government remains the most likely outcome.  Research by our Scotia Economics colleagues suggests that there is ultimately very little difference in the fiscal outcomes through 2025 between either the Liberal or Conservative parties’ platforms.  Either way, a minority will limit the next government’s room for significant manoeuvre.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.01% higher at 93.204. The dollar reaches a one-month high, boosted by recent strong economic data and speculation regarding Fed tapering. Fed policymakers will meet this week and open discussions about reducing their monthly bond purchases are expected.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Erdogan’s Waning Patience: Four Questions for Turkey’s Central Bank

The bank has kept its benchmark rate at 19% since March, when Erdogan installed Sahap Kavcioglu as its latest governor. That makes it one of the highest policy rates in the world – although so too is Turkey’s inflation rate, which touched 19.25% last month.

Ahead of a monetary policy meeting set for 2 p.m. (11:00 GMT) on Thursday in Ankara, here are four key questions:

IS A RATE CUT COMING?

After months of hawkish talk that allowed the lira to recover from an all-time low in June, the central bank has changed its tune in the last few weeks.

On Sept. 1 conference calls with investors, Kavcioglu did not repeat a longstanding pledge to keep the policy rate above inflation. Two days later, data showed inflation did indeed surpass 19% https://tmsnrt.rs/3yTLHBq, leaving real rates negative.

Kavcioglu also began downplaying this “headline” inflation figure and instead stressed that a “core” measure – which is lower – is more appropriate given the fallout from the pandemic.

In a speech on Sept. 8, he said a near 30% spike in food inflation represents “short-term volatilities”, so the bank will focus more on the core measure that dipped to 16.76%. He added that policy was tight enough and predicted a falling price trend in the fourth quarter.

Investors have taken all this as a dovish turn that suggests that rate cuts are on the way. Some have warned of a “policy mistake” if they come too soon.

Fourteen of 17 economists polled by Reuters expect easing to begin in the fourth quarter, with two, including the Institute of International Finance, predicting it will start this week.

“Though most expect no rate cut, the bank’s new guidance suggests it would not be surprising to see one on Sept. 23 if it takes a slight deceleration in core inflation as permanent,” said Ozlem Derici Sengul, founding partner at Spinn Consulting, in Istanbul.

HOW LONG WILL ERDOGAN WAIT?

Many analysts say Erdogan appears to be growing impatient for monetary stimulus, given loans are expensive and he faces a tough election no later than 2023. A few say a prompt rate cut could even signal plans for an early vote.

In recent months, the central bank has urged patience due to unexpected inflation pressure brought on by rising global commodities prices and a surge in summer demand as pandemic restrictions eased.

Despite the risk of currency depreciation https://tmsnrt.rs/3neUCLN and stubbornly high inflation, Erdogan will likely get what he wants soon.

A self-described “enemy of interest rates”, he ousted the last three central bank chiefs over a 20-month span due to policy disagreements.

In June, Erdogan said he spoke to Kavcioglu about the need for a rate cut after August.

In early August, he said “we will start to see a fall in rates” given it was “not possible” for inflation to rise any more.

Market tensions “are set to increase as President Erdogan continues to pile on political pressure for rate cuts, while inflation pressures are building,” said Phoenix Kalen, global head of emerging markets research at Societe Generale.

WHEN WILL INFLATION COOL DOWN?

Annual headline inflation should remain high through October and begin to dip in November due to the base effect of a jump late last year, since which it has continued to rise.

The government forecasts inflation will drop to 16.2% by the end of the year, while Goldman Sachs and Deutsche Bank see 16.7%. That should provide a window for at least one rate cut in the fourth quarter, most analysts say.

Yet because Turkey imports heavily, further lira weakness could push inflation higher and complicate or even thwart any easing. High import costs were reflected in the 45.5% annual jump in the producer price index last month.

Another risk is that the U.S. Federal Reserve removes its pandemic-era stimulus sooner than expected, which would raise U.S. yields and hurt currencies of emerging markets with high foreign debt, like Turkey.

Analysts say the biggest problem is the central bank’s diminished credibility in the face of political interference, leading to years of double-digit price rises and little confidence that inflation will soon return to a 5% target.

Ricardo Reis, a London School of Economics professor who presented a paper this month at the Brookings Institute, found that Turkey’s “inflation anchor seems definitely lost” based on market expectations data from 2018 to 2021.

HOW ARE INVESTORS AND SAVERS PREPARING?

When Kavcioglu downplayed inflation pressure earlier this month, the lira weakened 1.5% in its biggest daily drop since May. It has depreciated nearly 15% since Erdogan replaced Kavcioglu’s hawkish predecessor Naci Agbal in March.

Foreign investors hold only about 5% of Turkish debt after reducing their holdings for years.

Still, some say that rebounds in exports, tourism revenues and in the central bank’s foreign reserves make lira assets more attractive.

“With inventories so low in Europe, I can’t see how exports are not going to continue to do well,” said Aberdeen Standard Investments portfolio manager Kieran Curtis.

“It does feel to me like there is more of a move towards loosening from the authorities (but) I don’t think anyone is expecting a cut at the next meeting,” he said.

In Turkey, soaring prices for basic goods such as food and furnishings have prompted individuals and companies to snap up record levels of dollars and gold. They held $238 billion in hard currencies this month.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Ali Kucukgocmen in Istanbul and Marc Jones in London; Editing by Hugh Lawson)

USD/CAD: Loonie Hits Nearly One-Month Low Ahead of Snap Election

The Canadian dollar hit a near one-month low against its U.S. counterpart on Friday as falling energy prices and September 20 election uncertainties weighed on the commodity currency.

Next week’s federal reserve decision and the election in Canada will be closely watched by investors. Investors are concerned that Monday’s elections will lead to a deadlock that hinders government action against COVID-19 and impedes the recovery of the economy.

The USD/CAD pair rose to 1.2762 today, up from Thursday’s close of 1.2681. The Canadian dollar lost over 1.2% last month and has depreciated about 1% so far this month.

“Barring the scenario of a hung parliament, political uncertainty in Canada should ultimately dissipate, helping CAD realign with its short-term fair value. The latest data (labour market and inflation) have all but confirmed the view that the Bank of Canada will have to step in with another round of tapering in October, which should leave it on track to fully unwind QE by year-end, or by early-2022,” noted Francesco Pesole, FX Strategist at ING.

“Ultimately, markets will be left with some room to speculate that the first hike will be delivered before mid-2022 (which is currently in the BoC rate-path projections). The set of good fundamentals should, in our view, provide some sustained support to CAD into year-end, and we expect USD/CAD to trade consistently below 1.25 in 4Q21.”

Canada is the world’s fourth-largest exporter of oil, which edge lower as production in the Gulf of Mexico slowly returns. U.S. West Texas Intermediate (WTI) crude futures were trading 1.29% lower at $71.66 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

On Thursday, Canada’s Statistics Canada reported that wholesale sales declined 2.1% to $70.1 billion in July, as building materials and supplies sales plummeted. In total, it was the second consecutive decline and the biggest since April 2020. That raises concerns among investors that the economy is slowing.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.25% higher at 93.164. The dollar reaches a three-week high, boosted by recent strong economic data and speculation regarding Fed tapering. Fed policymakers will meet next week and open discussions about reducing their monthly bond purchases are expected.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher?

Last month marked the 50th anniversary of President Nixon’s suspension of the convertibility of US dollars into gold. This move broke the last, thin link between world currencies and the yellow metal, effectively ending the ersatz of the gold standard that we still had back then (the official end came in March 1973, marking the start of an era of freely-floating fiat currencies).

I wrote about the collapse of the Bretton Woods in the last edition of the Gold Market Overview, but as it was a truly revolutionary event that paved the way for today’s monetary conditions, it’s worth mentioning the topic again.

You see, as weak the diluted post-war version of the gold standard was, it limited the US central bank’s ability to increase the money supply, as there was still a possibility that other participants of the system would redeem their dollars for gold. But Nixon “suspended temporarily” the convertibility of the dollar into gold, and while gold is away, the mice will play. Without any true constraints, the pace of annual money growth hit double digits. The CPI inflation rates followed, and the great stagflation of 1970s emerged, as the chart below shows.

What’s more, without the discipline imposed by the gold standard, the central bank could much easier monetize the public debt. The governments could spend more, maintain fiscal deficits and increase their indebtedness. In short, without gold as an anchor for monetary policy, we got more money printing, more debt, higher inflation, and more severe financial crises.

Now, one could ask: if the current monetary system, or – as some analysts prefer to call it – non-system is so bad, why isn’t the price of gold higher? Shouldn’t it be rallying, indicating how rotten our fiat-money-debt-fueled economy is?

Well, there are many answers to this questions. First of all, let’s note that the price of gold has already surged about 4100%, or more than 7.7% annually, on average, since 1971 (see the chart below), which is really something!

Second, financial markets are great supporters of the current monetary system, as they love loose monetary policy and liquidity drips from the central banks. Please remember that the US stock market welcomed the closure of the gold window by increasing 3% the next day after Nixon’s infamous speech.

Third, even poor systems can work for a while. Communist economies didn’t collapse immediately, despite their obvious inefficiency. The Breton Woods worked for almost 30 years despite its evident flaws. Furthermore, there were some institutional changes implemented in order to strengthen the current system, such as central banks’ independence, inflation targeting, prohibition of direct monetization of public debt, etc.

However, probably the most important reason is that the gold standard was in a way replaced by the US dollar standard, as the greenback substituted gold as the world’s reserve currency. In such a system, there is simply no alternative to the US dollar as a global reserve. This is because America became even more central to global finance than it was in 1971 and because practically all countries conduct similarly unsound monetary and fiscal policies (and some central banks like the ECB or BoJ are even more radical than the Fed). The greenback’s strength limits dollar-denominated gold prices.

However, it’s worth remembering that unlike the gold standard, under which currencies were backed by gold (or: they were actually defined as units of gold’s weight), today’s currencies are backed only by the reputation of their issuers, which is not set in stone. This is actually why the Breton Woods eventually collapsed. Initially, the US enjoyed a great reputation, and no one even dared to question Uncle Sam’s ability to convert dollars to gold. But the prolonged war in Vietnam, Johnson’s great social programs, increased government spending and growing deficits undermined this reputation, and other countries started to demand gold for their dollars.

The same may happen in the future, especially given that Trump has left some scratches on America’s reputation. With Biden continuing his predecessor’s populist economic doctrine, the greenback should face further headwinds. What’s more, with ultra-low interest rates and a mammoth pile of debt, the room for inflating the economic bubble is limited. Although the return to the gold standard seems unlikely, the recurring business cycles and economic crises are more than certain. That’s great news for gold.

In other words, the current system persists mainly thanks to the faith in the central banks’ ability to control inflation, even without the discipline of the gold standard. However, this belief can break down one day. The Fed might be right that the current high inflation is temporary. But if not, we could have “Powell’s shock”, which could strengthen gold, just as Nixon’s shock did.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

Gold Downturn: Why Strong Fundamentals Are Not Everything

Gold plunged yesterday, just as it was likely to. The fake reason? U.S. retail sales exceeded expectations. The real reason? A major downtrend.

On the above gold chart, I added annotations that show what happened in the previous 3 cases after the retail sales reports. We saw the following:

  • gold declined after retail sales disappointed in June
  • gold topped after retail sales outperformed in July
  • gold paused its rally after retail sales disappointed in August
  • gold declined after retail sales outperformed in September

What should one make of that?

Nothing.

There is no clear link (and perhaps no link whatsoever) between U.S. retail sales and the price of gold. If gold had declined based only on great retail sales, then it surely should have soared based on disappointing retails sales in June, right? It plunged then.

For many weeks, months, and years, I’ve been writing that markets don’t need a trigger to move in a certain way. Getting one could speed things up, but the markets might eventually rally or decline on just about any piece of news, provided that they really “want to”. By markets “wanting” to move in a given way, I mean the fact that markets move in trends and cycles, and even if a given market has a very favorable fundamental situation for the long run, it doesn’t mean that it won’t slide in the short or medium term. That’s how markets work, and that’s been the case for decades, regardless of what gold permabulls might tell you.

Let’s face it, the monetary authorities around the world are printing ridiculous amounts of money, stagflation is likely next, and gold is extremely likely to soar based on that in the following years, just like what we saw in the 1970s.

But.

This is already the case – lots of money has been already printed, and the world has been suffering from the pandemic for well over a year. Gold should be soaring in this environment! Silver should be soaring! Gold stocks should be soaring too!

And what’s the reality?

Gold failed to hold its gains above its 2011 highs. Can you imagine that? So much money printed. Excessive debts. Even pandemic! And gold still failed to hold gains above its 2011 highs. If this doesn’t make you question the validity of the bullish narrative in the medium term in the precious metals sector, consider this:

Silver – with an even better fundamental situation than gold – wasn’t even close to its 2011 highs (~50). The closest it got to this level was a brief rally above $30. And now, after even more money was printed, silver is in its low 20s.

And gold stocks? Gold stocks are not above their 2011 highs, they were not even close. They were not above their 2008 highs either. In fact, the HUI Index – the flagship proxy for gold stocks – is trading below its 2003 high! And that’s in nominal prices. In real prices, it’s even lower. Just imagine how weak the precious metals sector is if the part of the sector that is supposed to rally first (that’s what we usually see at the beginning of major rallies) is underperforming in such a ridiculous manner.

And that’s just the beginning of the decline in the mining stocks.

More to Come!

The breakdown below the broad head and shoulders pattern (marked with green) was verified. The previous three similar patterns (also marked with green) were followed by huge declines, and I copied the moves to the current situation (marked with dashed lines). This simple analogy tells us that the HUI Index could slide to the 100 – 150 range, meaning that it could even decline to its early 2016 low.

Can it really happen? With the precious metals market as weak as it is right now (from the medium-term point of view, not the long-term one) — of course.

On a short-term note, please take a look at what silver just did.

It broke to new 2021 lows in terms of the closing prices. Indeed, back in August, silver’s intraday low was lower, but it didn’t close as low. That’s a major confirmation of the bearish price forecast for silver.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Dollar Index Climbs After U.S. Retail Sales Show Surprise Rebound

The dollar index, which measures the U.S. currency against six others, added to gains following the report and was last up 0.5% at 92.866. It hit its highest level since Aug. 27.

Retail sales rose 0.7% last month, boosted in part by back-to-school shopping and child tax credit payments, while data for July was revised down.

A separate report showed U.S. initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 332,000 for the week ended Sept. 11. Economists had forecast 330,000 applications for the latest week.

“If you look at the retail sales number, it’s quite constructive even with the revisions, so we are seeing the dollar benefit from that, particularly against the funding currencies like the euro, Swiss and the yen,” said Bipan Rai, North American head of FX strategy for CIBC Capital Markets in Toronto.

The news could bolster investor expectations for next week’s Federal Reserve policy meeting and how soon the U.S central bank will start to taper stimulus.

“It feels like whatever lingering concerns there were with the underlying economy … that was kind of washed away a little bit. So as we move towards the Fed next week, the evidence backs up the idea that we’re going to get a taper signal from the Fed at the meeting,” he said.

On Tuesday, the dollar index fell to a one-week low of 92.321 after a softer-than-expected inflation report. Its low for the month was 91.941, on Sept. 3, when payrolls data disappointed.

Investors are looking for clarity on the outlook for both tapering and interest rates at the Fed’s two-day policy meeting that ends next Wednesday.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy.

It also means the central bank will be buying fewer debt assets, in effect reducing the amount of dollars in circulation, which in turn lifts the currency’s value.

The dollar also gained 0.3% to 109.70 yen , after sliding to a six-week low of 109.110 in the previous session.

The euro was 0.4% lower at $1.1766.

The Swiss franc also fell against the dollar and was last at 0.9263 franc per dollar.

Elsewhere, the Australian dollar was down 0.5% at $0.7296.

Earlier, data showed the country’s jobless rate unexpectedly fell to 4.5%, but the statistics bureau said the change reflected a drop in the participation rate rather than a strengthening of the labor market.

In cryptocurrencies, moves in bitcoin were relatively subdued. It was last down 0.9% at $47,711. Ether changed hands at $3,589, down 0.7%.

AMC Entertainment Holdings Inc boss Adam Aron said in a tweet this week that the theater chain would accept ether, bitcoin cash and litecoin alongside bitcoin for ticket purchases.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Caroline Valetkevitch; Additional reporting by Ritvik Carvalho in London and Kevin Buckland in Tokyo; Editing by Alexander Smith, Mark Potter and Jonathan Oatis)

 

USD/CAD: Loonie Weakens as Oil Prices Slip, Election in Focus

The Canadian dollar weakened against its U.S. counterpart on Thursday as the firm greenback and falling energy prices weighed on the commodity currency ahead of the September 20 election.

The USD/CAD pair rose to 1.2688 today, up from Wednesday’s close of 1.2633. The Canadian dollar lost over 1.2% last month and has depreciated about 0.6% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edge lower as the U.S. storm threat fades. U.S. West Texas Intermediate (WTI) crude futures were trading 0.92% lower at $71.96 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

Moreover, Canada’s Statistics Canada reported that wholesale sales declined 2.1% to $70.1 billion in July, as building materials and supplies sales plummeted. In total, it was the second consecutive decline and the biggest since April 2020. That raises concerns among investors that the economy is slowing.

“In the near term, CAD faces a number of headwinds. Economic data momentum has turned negative. Softening incoming data combined with an impending election (20 September) means that BoC messaging is likely neutral in the near term,” noted analysts at Citi.

“However, for our medium-term view, given Canada’s high vaccination rate, more lockdowns seem very unlikely, and the economic data should come in more strongly as we shift away from 2Q prints. Canada will also likely see more fiscal post-election.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.37% higher at 92.892. On Thursday, retail sales data showed an unexpected increase in August, easing some concerns about slowing economic growth, which supported the greenback.

It is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

USD/CAD: Loonie Gains as Inflation Hits Highest Since 2003, Firm Oil Lends Support

The Canadian dollar strengthened against its U.S. counterpart on Wednesday after the annual inflation rate increased to an 18-year high in August; firmness in oil prices also lent support.

Inflation ticked above the Bank of Canada’s 1%-3% control range for the fifth consecutive month in August, according to Statistics Canada. Last month, the consumer price index grew by 4.1%, the fastest rate since March 2003.

The USD/CAD pair fell to 1.263 today, down from Tuesday’s close of 1.2693. The Canadian dollar lost over 1.2% last month and has depreciated about 0.3% so far this month.

“The Canadian dollar has shown some tentative signs of recovery at the start of this week, but yesterday’s risk-off turn in global markets sent USD/CAD back to the 1.2700 level. We think political uncertainty is currently taking a toll on CAD and partly explaining the divergence with the other oil-sensitive G10 currency, Norway’s krone, which has instead found more solid support of late,” noted Francesco Pesole, FX Strategist at ING.

“We think CAD will struggle to stage a sustained rally before Monday’s Federal election, when the emergence of a potential coalition may ease the negative drag of political noise on the currency.”

Canada is the world’s fourth-largest exporter of oil, which edge higher on low U.S crude inventories fell. U.S. West Texas Intermediate (WTI) crude futures were trading 3.63% higher at $73.02 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.13% lower at 92.502. The greenback broadly fell on Tuesday after inflation slowed in August after reaching its highest level in 13 years in July. That raised the question of when the Fed will taper stimulus and hike rates from the current record low.

However, it is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Dollar Falters After U.S. Inflation Rise Eases, Safe-Haven Yen, Franc Up

Several Fed officials have suggested the U.S. central bank could reduce its buying of debt securities by the end of the year, but said an eventual interest rate hike would not happen for some time.

The Fed will hold a two-day monetary policy meeting next week, with investors keen to find out whether a tapering announcement will be made.

Tapering tends to benefit the dollar as it suggests the Fed is one step closer toward tighter monetary policy. It also means the central bank will be buying fewer debt assets, effectively reducing the number of dollars in circulation.

Data on Tuesday showing the U.S. consumer price index, excluding the volatile food and energy components, edged up just 0.1% last month has raised doubts about tapering this year, some analysts said.

August’s core CPI rise was also the smallest gain since February and followed a 0.3% rise in July. The so-called core CPI increased 4.0% on a year-on-year basis after gaining 4.3% in July.

“The softer inflation prints caused investors to push back on bets that the Fed could move sooner to taper bond purchases. Easing inflation would take the heat off the Fed to move prematurely,” said Fiona Cincotta, senior financial markets analyst at City Index.

She also cited U.S. core producer prices (PPI) data for August released last week, which also rose at a slower pace. Excluding the food, energy and trade services elements, producer prices rose 0.3% last month, the smallest gain since last November. The so-called core PPI shot up 0.9% in July.

“So the evidence does appear to be building that peak inflation has passed. That said, supply chain bottlenecks are expected to persist for a while so it’s unlikely that either PPI or CPI will drop dramatically or rapidly,” Cincotta added.

In afternoon trading, the dollar index was slightly down at 92.601, moving away from a more than a two-week high on Monday.

The euro was flat against the dollar at $1.1807.

Risk appetite soured on Tuesday as well, with Wall Street shares down while U.S. Treasury prices were up sharply, pushing yields lower.

Investors looked past decelerating inflation and focused on uncertainties about U.S. growth now clouded by the economic impact of the Delta variant.

Against the safe-haven Swiss franc, the dollar dropped 0.4% to 0.9189 francs.

Versus another safe-haven, the Japanese yen, the dollar fell 0.4% to 109.615 ye

In other currencies, the Australian dollar fell to a two-week low after Reserve Bank of Australia Governor Philip Lowe painted a very dovish policy outlook with no rate hikes on the horizon until 2024.

The Aussie dollar was last down 0.7% at US$0.7319. In cryptocurrencies, bitcoin was last up 3.1% at $46,400 . Ether changed hands at $3,344, up 1.9%.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Saikat Chatterjee in London and Shreyashi Sanyal in Bengalaru; Editing by Nick Zieminski and Paul Simao)

 

USD/CAD: Loonie Strengthens as Oil Prices Rise on U.S. Supply Concerns

The Canadian dollar strengthened against its U.S. counterpart on Monday after oil prices climbed over $70 a barrel as U.S. supplies have been restricted following Hurricane Ida, which hit almost half of crude production in key producing regions.

The USD/CAD pair fell to 1.2643 today, down from Friday’s close of 1.2689. The Canadian dollar lost over 1.2% last month and has depreciated about 0.3% so far this month.

Canada is the world’s fourth-largest exporter of oil, which edge higher on low U.S. output after Hurricane Ida. U.S. West Texas Intermediate (WTI) crude futures were trading 1.05% higher at $70.46 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

“The electoral campaign in Canada is set to remain in focus with only 10 days to go before the vote, and we think that CAD is currently discounting some political risk as opinion polls show neither of the two major parties (Liberals and Conservatives) as likely to secure a full majority in the House,” noted Francesco Pesole, FX Strategist at ING.

“Next week, CPI data will be the main highlight and another above-consensus read may further support hawkish expectations on the BoC, but once again, political risk may cap CAD gains for now. Once political uncertainty dissipates, a short-term undervaluation vs USD (2.1%, according to our fair value model) and solid fundamentals all point to a rebound in the loonie, in our view.”

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.02% higher at 92.599. On Tuesday, September 14, the consumer price index is scheduled to be released. Global trends and inflation data will drive equity markets next week, which after a run of record-breaking trades have taken a breather. If the data continues to be hot, Treasury yields could rise, which would be negative for the market.

However, it is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

In August, Canada added 90,200 jobs, and the unemployment rate fell to 7.1%, its lowest level since the Coronavirus pandemic began. The data might support the Bank of Canada’s next taper in October. The Governor of the Bank of Canada, Tiff Macklem, said on Thursday that Canada is on its way to no longer needing quantitative easing to stimulate the economy.

Last week, the Bank of Canada held its key interest rate, citing fears that the pandemic and supply bottlenecks might stall the economic recovery. The central bank has maintained its overnight rate target at 0.25% and said it will continue buying bonds at a rate of $2 billion a week as part of its quantitative easing program.

Earnings Calendar Quiet Next Week; U.S. Inflation Print Could Dictate Market Trend

Earnings Calendar For The Week Of September 13

Monday (September 13)

IN THE SPOTLIGHT: ORACLE

The world’s largest database management company is expected to report its fiscal first-quarter earnings of $0.97 per share, which represents year-over-year growth of over 4% from $0.93 per share seen in the same period a year ago. The Austin, Texas-based computer technology corporation would post revenue of $9.8 billion.

Oracle’s current low valuation at ~16.7x CY22e EPS reflects its slower growth rate compared to peers. Despite potential opportunities within existing database customers and cloud-based ERP applications, offsets from waning businesses mean 2021 likely lacks the catalysts for the positive inflection in revenue growth investors would need to see to drive multiples higher,” noted Keith Weiss, equity analyst at Morgan Stanley.

“With management guiding to mid-single-digit CC revenue growth in a software sector filled with strong secular growth stories, and operating margins declining in FY22 due to heightened investment in Cloud, we remain Equal-weight while our price target moves up to $77.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE SEPTEMBER 13

Ticker Company EPS Forecast
ORCL Oracle $0.97
HRB H&R Block -$0.34

 

Tuesday (September 14)

IN THE SPOTLIGHT: KASPIEN HOLDINGS

Kaspien Holdings, an American company that provides software and services for e-commerce, is expected to report a loss of 47 cents a share revenue of around $39 million in the fiscal second quarter.

U.S. Inflation Data: On September 14, the consumer price index is scheduled to be released. Global trends and inflation data will drive equity markets next week, which after a run of record-breaking trades have taken a breather. If the data continues to be hot, Treasury yields could rise, which would be negative for the market.

“High inflation is also a reason to justify a Fed taper. Headline CPI is likely to remain close to 5.5% year-on-year this week with core inflation remaining at 4.3%. Given ongoing supply issues, rising labour costs and a clear sense of strong corporate pricing power – note the latest Federal Reserve Beige Book stated “several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead” – we see little reason for inflation to fall meaningfully before 2Q 2022,” noted James Knightley, Chief International Economist at ING.

“The risk is that rising inflation expectations keeps it higher. Consequently, we continue to look for the Federal Reserve to conduct a swift taper with asset purchases ending in 2Q and interest rates increasing from late 2022 onwards.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE SEPTEMBER 14

Ticker Company EPS Forecast
JD Jd Sports Fashion -£3.35

 

Wednesday (September 15)

Ticker Company EPS Forecast
JKS JinkoSolar Holding Co. Ltd. ADR -$1.03
RDW Redrow £0.17

 

Thursday (September 16)

Ticker Company EPS Forecast
AHT Ashtead Group £0.51

 

Friday (September 17)

No major earnings are scheduled for release

Dollar Gains With Yields as Fed Policy in Focus

The greenback has risen from a one-month low reached last Friday after jobs data for August showed that jobs growth slowed, while wage inflation rose more than expected.

It has not yet been able to establish a strong trend, however, as investors wait on new clues on when the Fed is likely to begin paring its bond purchases and, eventually, raise rates.

“That to me is the most important thing, is when does the Fed hike rates, and unfortunately we may not know that for a little while,” said Erik Nelson, a macro strategist at Wells Fargo in New York.

Cleveland Fed President Loretta Mester said on Friday that she would still like the central bank to begin tapering asset purchases this year, joining the chorus of policymakers making it clear that their plans to begin scaling back support were not derailed by weaker jobs growth in August.

Fed officials are grappling with rising price pressures while jobs growth remains below their targets.

Data on Friday showed that U.S. producer prices increased solidly in August, indicating that high inflation is likely to persist for a while, with supply chains remaining tight as the COVID-19 pandemic drags on.

The Wall Street Journal on Friday wrote that Fed officials will seek to make an agreement at the Fed’s September meeting to begin paring bond purchases in November.

The dollar index gained 0.05% to 92.57. It is up from a one-month low of 91.94 on Friday.

The U.S. currency had dipped earlier on Friday on improving risk sentiment on news that U.S. President Joe Biden and Chinese leader Xi Jinping spoke for the first time in seven months.

In a statement, the White House said Biden and Xi had “a broad, strategic discussion,” including areas where interests and values converge and diverge. The conversation focused on economic issues, climate change and COIVD-19, a senior U.S. official told reporters.

The dollar was last down 0.13% to 6.4419 yuan, nearing a more than two-month low of 6.4233 yuan reached last week.

The euro fell 0.07% to $1.1816 on Friday, a day after the European Central Bank said it will trim emergency bond purchases over the coming quarter.

For a look at all of today’s economic events, check out our economic calendar.

(Additional reporting by Ritvik Carvalho in London; Editing by Chizu Nomiyama)

USD/CAD: Loonie Gains After Solid Jobs Report Leaves BoC on Track to Taper

The Canadian dollar strengthened against its U.S. counterpart for the second straight session on Friday after an upbeat August jobs report puts the Bank of Canada on track for another taper next month.

The USD/CAD pair fell to 1.2578 today, down from Thursday’s close of 1.2662. The Canadian dollar lost over 1.2% last month and has depreciated about 0.2% so far this month.

In August, Canada added 90,200 jobs, and the unemployment rate fell to 7.1%, its lowest level since the COVID-19 pandemic began. The data might support the Bank of Canada’s next taper in October.

The Governor of the Bank of Canada, Tiff Macklem, said yesterday that Canada is on its way to no longer needing quantitative easing to stimulate the economy.

On Wednesday, the Bank of Canada held its key interest rate, citing fears that the pandemic and supply bottlenecks might stall the economic recovery. The central bank has maintained its overnight rate target at 0.25% and said it will continue buying bonds at a rate of $2 billion a week as part of its quantitative easing program.

“There is some progress and we think the data should offset a lot of the concern about the Bank’s policy stance following the weak Q2 GDP data and should provide some additional lift for the CAD via some stabilization (or re-widening) in short-term US-Canada spreads that have moved against the CAD in recent weeks,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Technical signals are mixed, reflecting some of the choppy trade seen in the past few weeks.  The USD retains a fair degree of bullish trend momentum on the daily and weekly DMI oscillators but the longer run charts also reflect persistent USD selling pressure on strength over the past two months and spot has pressure daily support (40-day MA) at 1.2593 into the end of the week.  A clear push below this point is needed to unlock more USDCAD weakness towards 1.2500/10 and, potentially, the low 1.24 zone (early August low at 1.2424).”

Canada is the world’s fourth-largest exporter of oil, which edge higher on low U.S. output after Hurricane Ida. U.S. West Texas Intermediate (WTI) crude futures were trading 2.22% higher at $69.65 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.01% higher at 92.487. After news that Chinese President Xi Jinping and US President Joe Biden talked for the first time in seven months, pro-growth currencies gained, weakening the greenback.

However, it is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.

Bank of Canada Signals It May Stop Adding Stimulus to Economy Soon

Macklem, in a speech the day after the central bank held its key interest rate at 0.25%, also said for the first time that when the Bank of Canada reduces stimulus it will do so by hiking rates before curbing its holdings of government bonds.

“As the recovery progresses, we are moving closer to a time when continuing to add stimulus through QE will no longer be necessary. We are not there yet,” Macklem said.

“Eventually, when we need to reduce the amount of monetary stimulus, you can expect us to begin by raising our policy interest rate,” he added in a webcast to a Quebec business group.

Macklem said the first step, once new stimulus is no longer needed, would be to move to a reinvestment phase of the QE program, during which the central bank will buy only enough bonds to replace those that are maturing – about C$1 billion ($791 million) a week. Doing so would maintain stimulus but not add new stimulus.

That would mean the reinvestment phase could begin as soon as next month if the Bank of Canada tapers its weekly bond-buying to C$1 billion from the currently targeted C$2 billion as part of its October interest rate decision, as expected, analysts said.

But Macklem made clear that a shift to reinvestment would depend on economic developments.

“Let me emphasize, when we get to the reinvestment phase and how long we are in it are monetary policy decisions that will depend on the strength of the recovery and the evolution of inflation,” he said.

“We are now in the fourth (COVID-19) wave. That could weigh on the recovery and our outlook,” Macklem later said while answering audience questions.

Macklem earlier noted that while many of Canada’s hardest-hit sectors began to rebound over the summer, the recovery is still choppy and uncertainty remains.

He pointed to rising COVID-19 cases and supply chain disruptions as risks to the global recovery that were also weighing on Canada’s economic performance.

“We expect these global supply chain problems will gradually be resolved, but it could take some time,” he said.

The Canadian dollar was trading 0.5% higher at 1.2625 to the greenback, or 79.21 U.S. cents.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 1.2638 Canadian dollars)

(Additional reporting by Fergal Smith in Toronto; Editing by David Gregorio and Paul Simao)

Fed’s Bowman Encouraged Still by Recovery, Taper Likely This Year

“Even though some of the recent data may have been less strong than we expected we are still looking at very robust economic growth,” Bowman said at an online event organized by the American Bankers Association. “We are very close to our goal on maximum employment…If the data comes in as I expect that it will, it will likely be appropriate for us to begin the process of scaling back our asset purchases this year.”

Bowman becomes the fifth Fed official in the past two days to signal that the disappointing August jobs report on its own would not stop the Fed from beginning to pare its bond purchases later this year.

Some, including Atlanta Fed president Raphael Bostic, suggested the addition of just 235,000 jobs in August, compared to nearly a million per month in June and July, might delay a final decision.

But the momentum remained in favor of starting the bond taper, a process some Fed officials are eager to begin as a first step in exiting from pandemic-era emergency programs.

It’s a turn other central banks have already begun, including the European Central Bank, and the process would be more complicated globally the longer the Fed waits and the less clear its plans.

Fed officials have tied any change in policy to economic variables, particularly job growth, that could be weighed down by the current surge of coronavirus cases – a risk highlighted by the August employment report.

Bowman said one month of disappointing data should not be given too much weight.

“It is important not to take too much signal from a single data point as we might have seen last week from the labor market,” Bowman said.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)