The second central bank currency market intervention in as many months sent the US dollar soaring and gold reeling overnight as market players rushed for various entry and exit doors to take advantage of the overt move. The selling of yen by the BoJ represented the third such event this year and it follows a fresh postwar high (at 75.35 vs. the USD) that the Japanese currency had reached just last week. The August intervention involved the selling of 4.5 trillion yen and it was the largest in seven years.
Last night's maneuver resulted in the greenback reaching a three-month high against the yen. The massive unilateral (as opposed to what the SNB and other central banks did in early September) pressured the yen some 4% lower during the wee hours and saw gold lose about 2%. Japanese Finance Minister Jun Azumi demonstrated that he had gotten the message from his country's numerous frustrated exporters and that battling speculators was the order of the day in order to rectify part of the situation.
Slumping exports are just about the last thing Japan can afford in the wake of the March 11 natural disaster. Exporters of the world's third largest economy are thought to be able to remain profitable at yen levels only near 86 vis a vis the greenback, or lower. As such, there are analysts who do not see last night's intervention as having been the last one just yet.
The yellow metal came to within striking distance ($4) of falling through the $1,700 level but managed to (thus far) hold above it. As regards the dollar's gains, well, it certainly recovered lost ground on the trade-weighted index (climbing more than 1.25%) and against the yen of course. The euro did not cede the $1.40 level just yet, however, there was a general feeling among market participants that the post-EU meeting euphoria seen late last week consisted mainly of optimistic "fumes" and that Europe still has to slog through quite a mess on its road to a state of credit repair.
To wit, the focus has already shifted to Italy among euro-zone watchers as Monday dawned. Over in Italy, failed lounge singer and would-be modern-day Casanova, Signore Berlusconi, remained Trump-like ego-filled as he defiantly asserted that "only I and my government can achieve the reform program" [imposed upon them by Ms. Merkel & Co. recently] and that thus "there is no way for me to stand aside." A Bloomberg editorial goes one step further and opines that, anyway, Europe may have just blown its last chance to finally put an end to the seemingly interminable debt crisis.
New York spot dealings opened notably lower than the levels that Friday's mild profit-taking had brought about. This morning's starting bids came in at $1,720 (down $24) in gold and at $34.33 (down 96 cents) in silver. There was a fairly massive, (larger than 360 tonnes' worth) "leakage" from silver ETFs in the latest market positioning reports that we parsed.
The notable loss in the metal's balances apparently reflects doubts on silver's current value among ETF players and a perception that last week's rally was overcooked. The Value View Gold Report Trading Thoughts latest issue feels that gold's perceived "solid floor" at $1,600 is not really all that solid and that the $1,500 zone represents a more meaningful test of support for bullion. VWGR's Ned Schmidt also opines that silver's latest rally was another case of "overdoing" by speculators.
Gold, on the other hand, still needs to overcome the $1,775 resistance area in order to maintain its recently reacquired bullish bent. Commodities traders are also paying attention to the trials and tribulations of MF Global Holdings as it has filed for bankruptcy and as its assets might be sold to derivatives trader Interactive Brokers Group. MF's market positions are sizeable and difficult to value but special attention will be paid to the firm's exposure to sovereign risk. For the moment, MF Global has been suspended from trading with the NY Fed as a primary dealer.
Platinum and palladium lost ground as well, with the former slumping $38 to the $1,609 per ounce mark and the latter sinking $13 to the $652 level. The speculative positioning reports from the CFTC still do not appear to reflect a whole lot of bullish optimism in the noble metals albeit trading firms continue to see value in them at the $1,550 and at $600 per ounce, respectively. Production costs remain very much an issue in the complex, unlike for gold and for silver (trading from two to three times and from seven to 10 times cash costs).
Copper fell more than 3% making last week's trader-based apprehensions that its best rally since 1986 might soon come to a halt a reality perhaps...a lot sooner than anticipated. Crude oil fell by over 1% while an assortment of base metals lost anywhere from 1.6% (aluminium) to 5.3% (lead). Finally, the Dow lost over 130 points in the initial hour of Monday morning's trading as October's hefty "wall of worry" rally appeared to be possibly morphing into what could be November's "slope of hope" pullback in values.
Today's early mood was certainly appropriate for tonight's costumed, house-to-house events to come. The week ahead presents plenty of opportunities for all kinds of market action as it is quite laden with data to come and dominated by the two-day FOMC meeting that starts tomorrow. We will have reports on October's light vehicle sales (Tue.), the ADP employment gauge (Wed.), ISM's nonmanufacturing activity metrics (Thu.), and the Labor Department's US employment roundup (Fri.).
Investors and other market players will certainly not ignore the reports coming from Cannes this week, either. No, we are not talking about the latest red carpet poses of Angelina Jolie or the seaside antics of Johnny Depp here. The G-20 is what meets later this week on the French Riviera, and its agenda is top-heavy with issues such as flagging global growth and everything Greek in flavor.
China has once again come out in support of the EU and its attempts to fix the mess it finds itself in; President Hu Jintao said that the Old World has the ability to surmount the current troubles but that his country stands ready to do whatever it can in order to assist " a friend in need." China has also been heard as advocating that Europe begin to borrow in yuan in order to gain possible "favors" from the world's largest creditor nation. Picture that US Treasury issuing renmimbi-denominated paper; now, there's a first for world monetary history books.
Tomorrow also marks the end of the "Trichet Era" as far as the ECB is concerned. Mario Draghi takes over as the head of the institution and he takes the seat of that office amid an epic struggle to resolve the European debt situation. Mr. Draghi will take to the microphones following his first ECB rate-setting meeting on Thursday. Like we noted, this will not be a week lacking in potentially market-moving news stories.
As regards the Fed, most watchers of it expect no changes in its rates or policies even though the dreaded "double-dip" appears to have been successfully skirted for now. Mr. Bernanke will fill everyone in on the details during his third formal press briefing. The Fed's projections for US economic growth for 2011 were dialed back from January's 3.9% to June's 2.9% amid the crisis in Europe and the after-effects of Japan's March quake.
At present, the 2012 forecasts by the Fed indicate possible US growth at the 3.7% level (itself, a projection that has been tempered from an initial 4.4%). Some Fed watchers do not expect material changes in the US central bank's policy until spring and envision a "hibernating" institution until then. To be sure, the Fed will continue to dissect employment, consumption, and inflation statistics until such time, at any rate; and attentively so. If sales at Tiffany's, Coach, and Nordstrom's are any indication, the (at least upper-echelon) US consumer continues to... consume despite also showing signs of being worried.
Last quarter, total consumption gained by 2.4% - a rate which was the fastest this year. September's retail sales increased by the most in seven months and cars were sold at a clip not seen since the first quarter of 2010. US households whose income is above $50K are expressing more confidence about the prospects for the country's economy if one looks at the past three months. Households earning $15 to $25K are not so optimistic, on the other hand. At any rate, the summer angst that was manifest during the Capitol Hill dukefest about the debt ceiling seems to have largely dissipated. It was a scary time for US consumers, to be sure.
Until tomorrow, do try and go scare someone else tonight - if you can.
Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.