US dollar weakness boosts precious metals to record highs

Gold rockets to its highest level in nine years as sentiment erodes for the greenback

One kilogramm fine gold bar are pictured in the Pro Aurum KG in Munich, Germany, on Wednesday, July 10, 2019. Photographer: Michaela Handrek-Rehle/Bloomberg
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US dollar bulls have been pummelled this month, as a combination of a dovish Federal Open Market Committee (FOMC), negative US growth forecasts and improving Covid-19 infection numbers worldwide sparked a flight out of the greenback.

In July alone, the US Dollar Index, a measure of the value of the US dollar against a weighted basket of major currencies, shed more than 3.68 per cent in value.

During this same period, the EUR/USD and GBP/USD pairings went through a mini summer rally, appreciating 4.4 per cent and 3.78 per cent respectively. The former is trading at its highest level since September 2018. But of course, the darling of the summer so far has been the precious metal segment.

Ultimately, I see the rout in the US dollar as a short-term correction and am poised for a comeback as we approach the fourth quarter and the presidential election race kicks off.

This week will see the expiry of the expanded jobless benefits in the United States – the US$600 (Dh2,203) a week in additional unemployment benefits that helped more than 20 million Americans during the past five months is set to officially end on Friday.

As Democrats and Republicans debate the workings of a new US$1 trillion recovery plan, the fine details are seemingly short of what the US economy needs. In the new plan, Republicans are proposing to cut the weekly emergency unemployment benefits from US$600 to US$200, along with a one-time US$1,200 benefits cheque.

The divide between the two parties is disappointing markets and eroding sentiment in US assets. Not only has the US been the most affected with the coronavirus, its response has been the poorest.

With the current plan set to expire, the seemingly inefficient cross-party political situation is not helping matters or giving any confidence to markets. This should keep a check on US asset classes.

Adding to this is the FOMC, which is set to deliver its policy announcement on Wednesday and is expected to maintain its dovish sentiment on future Federal Reserve policy.

Fed chairman Jerome Powell has kept the door open to further easing and has committed the Fed to do more if needed. This will also continue to keep a check on US dollar prospects.

Expect volatility to continue in  dollar asset classes on Thursday with the release of the US gross domestic product reading for the second quarter – expectations are for a huge contraction of 34 per cent, but it could be even deeper than that.

I will be keeping an eye on US 10-year Treasury yields, which are trading quite low and this will continue to be a good indicator of what markets are expecting going forward. Continued low yields suggest expected dovish Fed policy and vice versa.

Considering these factors, I would have to pause my long-standing dollar bias and widen my support levels in the US Dollar Index to 91.80-92 levels, which I expect to hold through to August.

Ultimately, I see the rout in the dollar as a short-term correction and it's poised for a comeback as we approach the fourth quarter and the presidential election race kicks off.

Across the pond, the handling of the virus in Europe has been impressive and the economic data points are suggesting a quicker economic recovery for the EU.

Earlier this week, data from Germany showed that the perception of the current business climate and expectations for the next six months grew to 90.5, well above the previous reading of 86.3.

The combination of Europe emerging from lockdown and the weaker dollar has seen the EUR/USD pairing approach two-year highs. From the current levels, I am expecting a test of the $1.1820 level this week with the potential to stretch to $1.20 levels in the month ahead.

Of course, this could quickly change amid coronavirus developments. At the time of writing, several European nations had reported spikes in Covid-19 cases, with some reverting back to lockdown tactics. If these cases increase, we can expect markets to adopt a risk-off approach, which would weaken the EUR/USD pairing in the short term.

Gold should continue to be well bought in the weeks ahead – I am expecting $1,885 to provide a strong floor in this current move and expect to see a test of $2,000 in the price of gold for immediate delivery. I am also looking to go long on silver and will watch for dips at about $21.60 before executing long positions.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti