Increased volatility due to World Economic Forum in Davos and US government

Market report Michael Blumenroth – 26.01.2018

Weekly market report

During the past week, we had little cause to complain of boredom. The root of all volatility lies in Davos, and those responsible can be found within the US government.

At a meeting of state and economic leaders in Davos, US Treasury Secretary Mnuchin made an offhand comment, stating that a weak dollar apparently benefits American trade, in referral to the fact that it causes US products to become cheaper on the global market. This in turn helps US companies against competitors from other countries. The remark caused considerable concern and caused the dollar, which had already plunged to a three-year low on Tuesday night, to further drop.

Trump sets record straight on Mnuchin statement

In a CNBC interview yesterday evening, President Trump however said that the dollar would get ‘stronger and stronger’ and thereby denied a change in fiscal policy in Washington. He said that he wants to see a strong dollar, because the currency’s value must be based on the strength of the US economy. Following the interview, the euro dropped against the US dollar by more than 1.5 cent. 

New three-year low for DXY while government bonds soar

A further highlight of the week was yesterday’s ECB meeting, where president Draghi stated his concern over possibly higher volatilities on the FX market. However, he avoided calling the euro ‘weak’. During his press conference, the euro rose to a new three-year high of 1.2538 against the US dollar, and the euro was in good company. The Swiss franc, pound sterling and the commodities currencies, yen and yuan, rose against the US dollar, causing the US dollar index DXY to plummet to a new three-year low.

For commodities investors, the weaker US dollar overcompensated the movements across the markets for government bonds, where market interest/returns also climbed to new tree-year lows (in the US and Germany).

Gold price in US-dollar reaches highest level since 2016, then slumps

In US dollar, the gold price finally surpassed its last cyclical high, reached on 8 September 2017 at 1,357 US$/ounce. While gold traded at 1,335 US$/ounce last Friday morning, it continually rose on the Asian markets and reached 1,366 US$/ounce yesterday morning – its highest level since summer 2016. Following the above mentioned Trump interview, the gold price fell to 1,343 US$/ounce in a reverse mirror reaction to the rising US dollar. This morning the US dollar slightly weakened and the gold price rebounded somewhat to 1,355 US$/ounce.

Xetra-Gold remains stable

Due to the extreme rise of the euro against the greenback, the gold price in euro marginally dropped. From 35.00 €/gram last Friday, the price of Xetra-Gold rose to 35.25 €/gram yesterday afternoon prior to the ECB meeting. After the euro gained significant strength and the gold price in US dollar dropped following the Trump interview, the price of Xetra-Gold fell to 34.85 €/gram. Xetra-Gold currently trades at the approximately same level as a week ago, 34.95 €/gram.

What’s coming up?

This afternoon, all eyes are on the speech Trump will be giving in Davos at 2 p.m. CET. Next Tuesday, Trump will deliver his State of the Union address, and Wednesday will see the last Fed meeting chaired by Janet Yellen before Jerome Powell takes over at the end of the week.

To all of our readers a relaxing weekend, hopefully with at least a few rays of sun.  

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