Intensifying concerns over global macroeconomic slowdown have led to rising demand on safe-haven assets, e.g.: gold, Japanese yen and Swiss franc, which has in turns triggered central bankers to intervene in the market to avoid excessive appreciation in their countries' currencies. With both the BOJ and SNB intervening in the currency market, more investors will turn to gold and send the metal's price even higher. The benchmark Comex contract surged to a new record high of 1675.9 before settling at 1666.3, up +1.33%. Price remains strong in Asia today.
Japanese Finance Minister Yoshihiko Noda confirmed that the government had intervened in the currency market but no details on the levels and the scale of the intervention were given. FX traders said that the BOJ endeavoured to keep the US dollar above 78 yen. It's the first time since March that the government stepped in to prevent the currency from appreciating excessively. BOJ's move helped lift Asian stocks as a weaker yen is expected to benefit Japanese exports. However, we believe the impact would only be temporary.
In European session yesterday, the SNB surprisingly announced that it would reduce the 3-month Libor target range to 0-0.25% from 0-0.75% and aimed to lower it to 'as close to zero as possible'. Moreover, the central bank will 'very significantly increase the supply of liquidity to the Swiss franc money market over the next few days'. The SNB will expand banks' sight deposits at the SNB from currently around CHF 30B to CHF 80B. The central bank will not renew repos and SNB Bills that fall due and will repurchase outstanding SNB Bills, until the desired level of sight deposits has been reached. As one of the most popular safe-haven investment, CHF has rallied to record highs against USD and EUR. This triggered the SNB to intervene in the market as excessive appreciation in CHF is effectively a form of monetary tightening that the central bank believes would dampen the country's economic growth. We believe SNB's decision will lead to a weaker CHF in the near-term. However, as long as global economic uncertainties persist, CHF, as well as other safe assets, will remain attractive.
Central banks' intervention benefit gold and should lead to even more demand in the yellow metal as it becomes the only safe asset that no intervention would be made. While some economists suggest that the US can sell some of its gold reserves to pay for its debts, it will not affect gold's price much as central banks in emerging markets have strong lure for the metal.
The dataflow suggested that the US slowdown may not only be a transitory one. ISM non-manufacturing index surprisingly fell to 52.7 in July from 53.3 a month ago. The market had expected a rise to 53.8. Factory orders contracted -0.8% in June, erasing the +0.8% in the previous month. The job market data were mixed. Challenger showed that job cut jumped +59.4% y/y in July, the biggest increase in 16 months, while ADP reported a +114K addition in payroll in July, following a downwardly revised +145 gain in June.