Gold Price Forecast: XAU/USD to come under pressure if real rates remain elevated – SocGen

 Gold has resisted higher real rates, strong dollar and fund outflows, but remains vulnerable, in the view of strategists at Société Générale.

Gold has outperformed treasuries and TIPS so far this year

“In the past, we have observed that gold seems to correlate well with three factors – US real rates, the dollar and ETF flows (regression r-squared of almost 95%). However, the price of gold has remained quite elevated compared to the theoretical value yielded by our models.”

“If real rates remain elevated for the foreseeable future, one of the assets that could come under pressure is gold.”

“Gold has outperformed treasuries and TIPS so far this year, but may not be able to resist the high yield for much longer if there is no pivot in the near-term from the Fed.”

When are the US durable goods orders and how could they affect EUR/USD?

 

US durable goods orders overview

Wednesday's US economic docket highlights the release of Durable Goods Orders data for July. The US Census Bureau will publish the monthly report at 12:30 GMT and is expected to show that headline orders rose 0.6% during the reported month, marking a notable slowdown from the 2% increase recorded in June. Orders excluding transportation items, which tend to have a broader impact, are anticipated to grow by a modest 0.2% in July as compared to a 0.4% rise reported in the previous month.

Analysts at Wells Fargo offer a brief preview of the report and explain: “Demand for goods is slowing. That is as true for business spending as it is for personal consumption. For businesses, the growing concern the economy is about to tip into recession is weighing on activity, as well as higher borrowing costs and demand largely having been pulled forward throughout the pandemic.”

How could it affect EUR/USD?

Ahead of the key data, the emergence of fresh US dollar buying drags the EUR/USD pair back closer to its lowest level since December 2002 touched the previous day. A stronger-than-expected domestic data will reinforce hawkish Fed expectations, which, in turn, should result in higher US Treasury bond yields and a stronger USD.

Conversely, a weaker report will further fuel concerns about a global economic downturn and weigh on investors' sentiment, offering some support to the greenback's safe-haven status. This, along with fears of a prolonged energy-supply crunch in the Eurozone, suggests that the path of least resistance for the EUR/USD pair is to the downside.

That said, any immediate market reaction is more likely to be short-lived as market participants might prefer to wait on the sidelines ahead of Fed Chair Jerome Powell's appearance at the Jackson Hole symposium on Friday. Nevertheless, a big divergence from the expected readings might still provide some meaningful impetus to the EUR/USD pair.

Eren Sengezer, Editor at FXStreet, meanwhile, offered a brief technical outlook for the EUR/USD pair: “On the four-hour chart, the Relative Strength Index (RSI) indicator stays well below 40 after having moved out of the oversold territory on Tuesday. Additionally, EUR/USD is yet to make a four-hour close above the descending regression channel coming from August 12. Both of these technical developments suggest that the pair's latest recovery was a technical correction rather than a reversal..”

Eren also outlined important technical levels to trade the EUR/USD pair: “In case the pair starts using 0.9950 (static level, upper limit of the descending regression channel) as support, it could face interim resistance at 0.9975 (20-period SMA) before testing parity. On the downside, 0.9900 (static level, psychological level) aligns as first support before 0.9870 (former resistance area from October 2002) and 0.9800 (psychological level).”

 Dow Futures Fall 120 Pts; Earnings in Focus as Week Closes

U.S. stocks are seen opening marginally lower Friday, continuing the previous session’s selloff on fears of sharp monetary policy tightening while quarterly corporate earnings continue to emerge.

At 7 AM ET (1100 GMT), the Dow Futures contract was down 120 points, or 0.4%, S&P 500 Futures traded 14 points, or 0.3%, lower and Nasdaq 100 Futures dropped 36 points, or 0.3%.

The three main Wall Street indices closed substantially lower Thursday after Federal Reserve Chairman Jerome Powell offered up his most aggressive approach to taming inflation to date, largely cementing a 50-basis-point rate hike at the central bank’s May meeting.

The blue-chip Dow Jones Industrial Average closed more than 300 points, or 1.1%, lower, the broad-based S&P 500 fell 1.5% and the tech-heavy Nasdaq Composite suffered the most, dropping 2.1%.

Looking at the week as a whole, the Dow is on course to register a gain of 1%, which would break a three-week losing streak, the S&P 500 is largely flat, and the Nasdaq Composite is down 1.3%, which would be its third consecutive losing week.

Away from future Fed moves, investors are also focusing on the new earnings season. So far, with a few notable exceptions, Netflix (NASDAQ:NFLX) springs to mind, big companies have been relatively positive on the outlook for the current quarter and the remainder of the year.

More results are due Friday, with the focus on the likes of wireless carrier Verizon Communications (NYSE:VZ), credit card company American Express (NYSE:AXP) and manufacturing conglomerate Honeywell (NASDAQ:HON).

After the close Thursday, social media platform Snap (NYSE:SNAP) warned that the high inflation could hit revenue growth even as it forecast second-quarter daily active users at between 343 million and 345 million, above Wall Street estimates of 340 million.

Clothes retailer Gap (NYSE:GPS) cut its forecast for quarterly sales, citing execution challenges at its Old Navy brand, adding the head of this brand, Nancy Green, was leaving the company.

The economic data slate centers around the release of business activity data for April, with the manufacturing PMI seen falling back slightly from the previous month’s 58.8, and the Markit composite PMI dropping from March’s 57.7.

The equivalent data saw a two-speed Eurozone, with the bloc's dominant services sector seeing a sharp increase in activity as consumers shrugged off soaring prices, while manufacturers struggled on the back of supply chain disruptions.

Oil prices weakened Friday, weighed by prospects of interest rate hikes and slowing global growth, while China, the world’s largest crude importer, continued to struggle with a COVID-19 outbreak.

The week ends with the release of U.S. oil rig numbers from Baker Hughes and CFTC speculative positioning data. 

By 7 AM ET, U.S. crude futures traded 1.5% lower at $102.21 a barrel, while the Brent contract fell 1.4% to $106.82. Both benchmarks are on course for weekly losses of over 4%.

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Russian companies, banks could reap windfall from depositary receipt delisting

Russian companies and global banks including BNY Mellon (NYSE:BK), Deutsche Bank (ETR:DBKGn), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) could profit if Moscow moves to de-list Russian companies' depositary receipts from foreign exchanges, according to two people familiar with the matter.

The potential windfall is due to the fees that bank issuers of depositary receipts can contractually charge investors when they cancel the product.

It is unclear how much companies and banks could make or if banks will charge the fees and risk angering investors who say it would be unfair given the extraordinary circumstances which have been triggered by Russia's invasion of Ukraine.

However, the fees could potentially translate into hundreds of millions of dollars according to Reuters' calculations based on fee data provided by the sources.

Assailed by Western sanctions, Moscow is preparing to de-list Russian company depositary receipts from foreign exchanges and convert them into local Russian securities in a bid to reduce foreigners' control over these companies.

Depositary receipts are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. They allow investors to dabble in overseas stocks in their own geography and time zone.

There are more than 30 depositary receipts on Russian companies including Gazprom (MCX:GAZP), Rosneft, Lukoil and Norilsk Nickel issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, trading on U.S. and European markets.

Under standard agreements, depositary receipts can be canceled by the issuer or the investor. When that happens, the investor typically gets cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.

Banks charge an administration fee, typically around $0.05 per receipt, which may be shared with the companies, two sources said.

If Moscow de-lists Russian depositary receipts, banks will have to cancel the products. Banks could still charge the fees, even though their hand was forced, according to three sources.

For example, an investor in Rosneft with 150 million depositary receipts representing the same number of shares in the company could be on the hook for $7.5 million in cancellation fees, according to Reuters' calculations.

Sweeping Western sanctions could make it challenging for banks to transfer the cash to some companies.

Regardless, some investors say the fees should not apply. One global asset manager told Reuters that if Russia passes the de-listing law there should be no fees as investors would have no choice in the matter. The other two sources, however, say banks still have to cover their costs.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup declined to comment. Russian companies did not respond to a Reuters emails seeking comment.

MARKET FREEZE

As Western sanctions pummeled Russian stocks from late February, the Moscow exchange closed and the Russian central bank banned foreigners from transferring shares out of their custody accounts. It also barred foreigners from selling Russian shares.

The restrictions made it nearly impossible for banks to cancel receipts when asked by investors anxious to slash their Russia exposure.

With curbs on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But because the foreign banks still can't sell the shares, investors have to take custody of them instead. To do that, investors need an account in Russia, which many don't have.

As a result, a lot of investors are likely to hold onto the receipts for the time being, according to three people.

Many investors are worried, however, about the de-listing bill which Russia is preparing.

Aside from the potential cancellation fees, investors are worried about what will happen if they can't open a local custody account.

In a note to clients, JPMorgan said clients may be able to open a Russian account under some unspecified circumstances if the new law is passed.

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 Gold Price Forecast: XAU/USD treads water around $1,930, in search of fresh direction

• Gold price is keeping its weekly range trade intact around $1,930.
• US dollar, yields capitalize on increased bets of a 50-bps May Fed rate hike.
• Gold Price Forecast: Will XAU/USD close the week above critical 21-DMA at $1,935?

Gold price is flatlined while trading within the mid of this week’s range around $1,930 so far this Friday. The market sentiment has somewhat improved in European trading, which has triggered a pullback in the US dollar and the Treasury yields. Although the underlying concerns over the aggressive Fed’s tightening and the Western sanctions on Russia are likely to keep the dollar bulls hopeful amid a data-light US docket. The Fed commentary continued to back the case for a 50-bps rate hike in the May meeting, dulling the demand for the non-interest-bearing gold price. The bulls need a decisive close above the 21-Daily Moving Average (DMA) at $1,935 to kick start a fresh uptrend. Attention now turns towards the critical US inflation data due next week. Meanwhile, the sentiment around the dollar and yields will continue to have a significant impact on the bright metal.

Gold (XAU/USD) has tumbled below its principal cushion of $1,930.00 as the market participants are raising bets on settlement of the US dollar index (DXY) above the crucial resistance of 100.00. The precious metal is falling gradually in the Asian session after a mildly positive start on Friday.

The discussions over pushing the interest rate to its mean reversion by the Federal Reserve (Fed) policymakers are underpinning the greenback against the yellow metal. A preliminary estimate of the yearly US Consumer Price Index (CPI) at 6.6%, which will release next week, is dictating the story of soaring inflation. Federal Open Market Committee (FOMC) members have narrated the neutral rate at 2.4% at which demand will not dampen and growth will not de-escalate. To shift the current interest rates to the neutral rate, the Fed has already announced one or more interest rate hikes by 50 basis points (bps) out of the six interest rate hikes to be announced this year.

The DXY is trading around 100.00, seeking a trigger that will drive the asset higher. Meanwhile, the 10-year US Treasury yields are trading at 2.66%, at the press time and are looking to extend gains by overstepping a three-year high at 2.67%.

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 USD/JPY flirts with daily high, around 122.70-122.75 region post-US NFP report

• USD/JPY regained positive traction on Friday and snapped three successive days of the losing streak.
• The risk-on mood, the Fed-BoJ policy divergence weighed on the JPY and continued lending support.
• Elevated US bond yields, mostly upbeat US NFP data underpinned the USD and favours bullish traders.

The USD/JPY pair held on to its intraday gains, above the mid-122.00s through the early North American session and had a rather muted reaction to the US monthly jobs report.

The headline NFP print showed that the US economy added 431K jobs in March as against 490K expected, though the disappointment was offset by an upward revision of the previous month's reading to 750K. Additional details revealed that the unemployment rate dropped to 3.6% from 3.8% in February and Average Hourly Earnings grew 0.4% from the 0.1% previous.

The data reaffirmed market bets that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. This was reinforced by elevated US Treasury bond yields, which underpinned the US dollar. On the other hand, the Japanese yen was weighed down by the Bank of Japan's commitment to aggressively defend its 0.25% yield cap.

This, along with a generally positive tone around the equity markets, dented demand for safe-haven JPY and acted as a tailwind for the USD/JPY pair. This marked the first day of a positive move in the previous four and assisted the pair to stall its pullback from levels above the 125.00 psychological mark, or the highest since August 2015 touched earlier this week.

With Friday's key data out of the way, the market focus shifts back to fresh developments surrounding the Russia-Ukraine saga. The incoming headlines will influence the broader market risk sentiment. This, along with the US bond yields and the USD price dynamics, should provide some impetus to the USD/JPY pair and allow traders to grab some short-term opportunities.

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