Patience sometimes pays off

The financial markets kicked off the new month with a bang. Currency markets returned to the spotlight after a long absence, due to the election results in Mexico, South Africa and India, among other countries. So-called carry trades are proving popular with investors on the FX markets this year. They involve borrowing a currency with a low interest rate and simultaneously investing it in a currency from a country with a high (base) interest rate.

Turbulent currency markets

In recent months, many carry trades focused on the currency pair Japanese yen (key interest rate 0.1 per cent) and Mexican peso (key interest rate 11 per cent), causing a strong appreciation of the peso. The elections in Mexico caused a significant counter-reaction: market players were concerned that the new government, with its two-thirds parliamentary majority, could implement constitutional changes that would have a negative impact on the local financial markets. At the beginning of the week, investors therefore turned to large-scale unwinding of carry trades. The peso lost around nine per cent against the yen at its peak. The currencies of South Africa, India and Hungary, amongst many others, also came under heavy pressure, whereas the Swiss franc and yen both appreciated.

US economic data weaker than expected

The gold price remained relatively unaffected and did not benefit from the increased volatility in the markets. In other words: gold was not in demand as a safe haven. Things changed yesterday, with the precious metal benefiting from the decline in government bond yields, which has been ongoing since the beginning of the week. This was due to weaker than expected US economic data – in particular, the number of job vacancies has recently fallen noticeably, indicating a less strained labour market. The ISM manufacturing index, a much-watched early indicator of short-term US economic development, also disappointed. While only one interest rate cut by the US Federal Reserve was priced in recently, the money futures markets are now expecting around two due to the weaker economic data.

Gold in US dollars with slight weekly gain

Last Wednesday, the precious yellow metal traded at 2,359 US$ per ounce. With a few ups and downs, it moved sideways between Monday’s low of 2,315 and the high of 2,36 yesterday evening and rose overnight to 2,375. Patience was key. At around 8:00 this Thursday morning, gold traded at 2,368 US$ per ounce as the European markets opened.

Xetra-Gold stable at previous week’s level

The Xetra-Gold price dropped from 69.90 € per gram Wednesday morning last week to 68.50 yesterday, partly due to the slightly firmer euro/US dollar exchange rate but recovered to 69.65 yesterday afternoon. This morning, Xetra-Gold is likely to start the day slightly higher at around 69.90 € per gram.

At the ECB meeting this afternoon, the first interest rate cut since 2019 is expected to be announced and already priced in by the markets. The ECB outlook and US labour market data, due to be published tomorrow, are likely to be more exciting. Next Wednesday, all eyes will be on the publication of US consumer price data, followed by the Fed interest rate decision in the evening. 

I wish all our readers a sunny weekend.