The recent rise in gold and US dollar indicates that market expects Fed to maintain a dovish stance. If Fed maintains its willingness to take all possible measures and forecasts weaker economic growth it will be positive for gold but we may not see much reaction.
Ravindra Rao
US Federal Reserve will conclude its two-day meeting today and a decision is due at 23:30 hrs IST followed by a press conference at midnight (June 11).
The Fed is expected to keep interest rate unchanged at 0-0.25 percent and this has been factored in. Focus more will be on its future stance and economic projections. Fed has so far maintained willingness to take all possible measures to support the economy and if it reiterates its stance we may not see much reaction. Fed’s economic projection will highlight the impact of the virus outbreak on the US economy, as well as the future path, for interest rates. If the Fed maintains its weaker outlook for the US economy and forecasts that interest rate will remain low, it will add to the pressure on the US dollar which will be positive for commodities.
COMEX gold trades mixed near $1,720/oz after a 1 percent gain yesterday. Gold has rebounded sharply after taking support near the key $1680/oz level. Price has also benefitted from the halt in the recent rally in US equity markets as mixed economic data, rising virus cases globally and downbeat growth forecasts questioned the sustainability of recent gains.
Gold recovered also amid position squaring ahead of Fed decision today. Fed is largely expected to keep monetary policy unchanged and may reiterate its willingness to take all possible measures to support the economy. The market's focus will now be more on the Fed’s economic projection to gauge the impact of the virus outbreak on the economy and also to assess how long the Fed’s supportive measures may be needed.
Market players may also assess the US central bank's statement in light of recent upbeat non-farm payrolls data to gauge if economic recovery is strong enough for the central bank to halt its stimulus measures. The US dollar index is also trading in the vicinity of March lows. Weighing on price is weakening investor interest with gold struggling to sustain above $1,750/oz and with improving risk sentiment.
Gold holdings with SPDR ETF fell by 0.87 tonne to 1124.603 tonne yesterday. Holdings with the fund have fallen for last four consecutive sessions after hitting April 2013 highs. Gold has recovered on choppy equity markets and expectations that the Fed may maintain dovish stance and downbeat outlook for the US economy.
We, however, do not expect a sustained rise as general momentum for the equity market is still on the upside which may keep a check on gold’s safe-haven buying. The key event for the day is the FOMC decision. The recent rise in gold and the US dollar indicates that the market expects the Fed to maintain a dovish stance. If the Fed maintains its willingness to take all possible measures and forecasts weaker economic growth, it will be positive for gold but we may not see much reaction.
On the other hand, if the Fed expresseS some optimism about economic recovery it may dent hopes of additional measures pressurising gold price. Apart from the Fed, the focus will be on development relating to virus outbreak and US-China tensions.
NYMEX crude trades weaker near $38.3 per barrel after a 2 percent gain yesterday. Crude rose yesterday after a 3.4 percent decline a day earlier. Crude oil has turned mixed after testing the $40/bbl level as market players assess possibility of recovery in US crude production as well as slow and uneven economic recovery.
Weighing on crude price is API weekly report which noted an unexpected 8.4 million barrels increase in US crude oil stocks and a sharp rise in distillate stocks. API, however, noted an unexpected decline in gasoline stocks and further decline in stocks at Cushing, the delivery terminal for NYMEX crude futures. Also weighing on price is the halt in the rally in the US and global equity markets as mixed economic data and downbeat growth forecasts highlighted the uneven pace of economic recovery.
Meanwhile, market fears of a resurgence in cases are also high amid rising cases worldwide and rushed reopening of economies. Also weighing on price is easing storm concerns. As per US BSEE, about 31.1% of crude production in the Gulf of Mexico was shut on June 9 as against 34.025 a day earlier. OPEC’s largely in line with expectations decision to extend production cuts by another one month and Saudi, Kuwait and UAE’s decision to not extend the voluntary production cuts they announced for June also brought a halt to gains.
However, supporting crude price is the forecast of lower US production. US EIA, in its monthly outlook, lowered 2020 US crude production estimate from 11.69 million barrels per day (bpd) to 11.56 million bpd while 2021 estimate was revised down from 10.9 million bpd to 10.84 million bpd. Also supporting price is supply concerns relating to Libya.
As per Reuters reports, Libya said it declared force majeure on some exports from its Sharara oilfield on Tuesday. Also supporting price are efforts by OPEC producers to improve compliance with production cuts. As per Bloomberg reports, Iraq has asked some Asian refiners to consider forgoing prompt shipments of its Basrah crude.
Crude oil may witness choppy trade as market players seek justification for the sustainability of price above USD 40/bbl level however general bias is still on the upside on hopes of tighter markets. Focus today will be on EIA report which is expected to note a 1.7 million barrels decline in US crude oil stocks and an increase in gasoline and distillate stocks. Also in focus will be FOMC decision which will affect the US dollar as well as general risk sentiment.
The author is VP- Head Commodity Research at Kotak Securities.
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