Gold price edges higher while crude oil trades a tad lower amid renewed worries over European deficits problems and the impacts on economic growth.
At the FOMC later today, the Fed will leave the policy rate unchanged at 0-0.25% and reiterate current economic conditions warrant to keep interest rates at 'exceptionally low' levels for 'an extended period'. As the previous meeting was held before sovereign crisis in the Eurozone elevated, the market will watch closely the Fed's comments on the issue and its impacts on the US and the world economy. In fact, US exports to the Eurozone account for just 1% of US GDP. Therefore, slowdown in Eurozon economy will have mild impact on the US. However, we expect Fed Chairman Ben Bernanke will deliver a slightly more dovish statement as domestic economic data (housing, jobless claims, retail sales and CPI) released recently have been somehow disappointing.
In our opinion, a dovish statement may delay market expectations of a Fed rate hike. This would be positive for gold price as low rate environment reduces opportunity cost of owning gold. However, slowdown in growth and inflation should weigh on prices of energies and base metals as demands will be affected.
The BOC minutes unveiled that Andrew Sentence, an MPC member, favored to raise the policy rate, by +25 bps, to 0.75% as inflation would be resilient after recession. The MPC voted 7-1 to keep the policy rate unchanged at 0.5% and unanimously for maintaining the asset purchase program at 200B pounds. The pound extends rally after the minutes
Although the 6-month moratorium that US President Obama put in place on May 27 was lifted, oil companies with operation in the deep waters of the Gulf of Mexico have no plans to resume drilling until the issue has been clear. The While House will certainly appeal. Interior Secretary Kenneth Salazar said he will issue 'a new order in the coming days that eliminates any doubt that a moratorium is needed, appropriate, and within [their] authorities'. The lift does not change our view that the overall impact of the moratorium on production is limited IF the drilling ban ends 6 months later, given the high inventory level and huge spare capacity in the country. However, the overhang is if the government will extend the moratorium beyond 6 months.
Economic data that worth attention includes US new home sales which probably plunged to 430K in May from 504K a month ago. Canada's retail sales are expected to have contracted -0.4% m/m in April, after gaining +2.1% a month ago.