Central banks remain powerful creatures. Will gold escape from their grip?
Bank of Japan
It’s a hot period in central banking. On Tuesday, the Bank of Japan kept its monetary policy on hold. Kuroda tried to convince the markets that the BoJ won’t follow the Fed towards an exit from easy monetary policy soon. “We haven’t reached the stage of thinking about how to handle an exit [from monetary easing]”, he said. The BoJ Governor also insisted that the bank is fully committed to easy monetary policy and is not about to scale back its stimulus.
However, the Japanese economy enjoys strong economic momentum. It has recorded seven consecutive quarters of positive growth, with the average annual rate reaching 1.9 percent. And with the unemployment rate at 2.7 percent, the country is now at full employment. What is only missing is inflation. But Kuroda stated in Davos that the inflation is now close to the BoJ’s target. He said:
There are some indications that wages are actually rising and some prices have started to rise (…) There are many factors that made the 2 percent target difficult and time-consuming but we are finally close.
As a consequence, investors remained optimistic about monetary policy normalization in Japan in the future. As one can in the chart below, the Japanese yen strengthened the greenback. It was music to gold’s ears.
Chart 1: USD/JPY exchange rate over the last five days.
On Thursday, the ECB released its most recent monetary policy statement, while Draghi answered questions at the press conference. The ECB also kept its monetary policy unchanged. However, in his introductory statement, Draghi was quite optimistic about inflation.
The strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthen further our confidence that inflation will converge towards our inflation aim of below, but close to, 2%.
These remarks were welcomed by euro bulls. The euro hit $1.25, a level not seen since 2015. The common currency increased despite Draghi’s efforts to pause its rally. He said:
At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. Against this background, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.
Moreover, the President of the ECB signaled no interest rate hikes this year. “Based on data, on today's data and today's projection, I think I see very few chances at all that interest rates could be raised this year”, he stated.
These comments made the euro give up its gains, as the chart below shows. Nevertheless, the euro came out victorious last week. The same applies, of course, to gold (see the chart 3), which also doesn’t like the U.S. dollar.
Chart 2: EUR/USD exchange rate over the last five days.