CM: Commodities Strengthen as USD Falls Across the Board
Financial markets continued to be buoyed by Fed's QE program. Stocks strengthened in Asian and European sessions in anticipation that the measure to buy more Treasury securities will help revive economic growth. USD weakened across the board, driving commodities and growth currencies higher. The front-month contract for WTI crude oil price soared for the 4th straight day and broke above 83 briefly. Gold price rose above 1360 while silver, platinum and palladium all advanced robustly. The focus today has turned to Europe where both ECB and BOE will meet today.
Apart from QE-induced rally, gold's fundamentals remain positive. According to the World Gold Council, China's gold demand may double to 800-900 metric tons in 10 years' time as driven by investment and jewelry demands. In fact, the Chinese government is also advised to increase its gold holdings in currency reserves so as to diversify from its ample holdings. As of the end of June 2010, the reserve holds $2.4543 trillion, making it the highest foreign exchange reserve in the world, followed by Japan as a distant second. While the actual composition of the holdings is a secret, Chinese official said that USD holdings make up 60% of the reserve. A new round of QE measures by the Fed should weaken USD further and we expect emerging countries, which usually hold huge amounts of dollar-denominated assets, will increasingly shift to gold from the dollar.
Economic data released today failed to affect the market. In Australia, retail sales grew +0.3% m/m in September, same as the level in August while the market had anticipated an improvement to +0.5%. Separately, trade surplus narrowed more than expected to AUD 1.76B in September from 2.35B a month ago. The indicators have not affected bullishness on AUD which rallied above 1.01 against USD as the Fed pledged to inject extra liquidity to the market.
At the ECB meeting, President Trichet will leave the main refinancing rate unchanged at 1% and state current levels of interest rates at appropriate. While the 16-nation region Eurozone's economic recovery has recently been stronger than expected, ECB's road to exit stimulus may be delayed as the Fed implemented additional easing measures. Trichet may also encounter questions about fiscal conditions in peripheral European economies. The BOE will also leave the Bank rate unchanged at 0.5%. There have been talks about expansion of asset buying program to boost growth but better-than-expected GDP and PMI readings allow policymakers more time to discuss about the issue. We expect another month of 3-way policy split.
