So what’s fallen fastest in the past couple of weeks or so – gold or the Aussie dollar? The answer is clear – both have surprised on the downside. Not for their weakness – that has been apparent for a while, but for the speed of the fall.
Now there’s a real chance the falls could go on and both the dollar and gold could overshoot on the downside.
Momentum is everything and at the moment, it’s pushing lower for gold, most other commodities, sentiment about China, and of course, the Aussie. The dollar has now weakened for the past five weeks as offshore investors quit commodity-related stocks.
Selling from Japan has been noticeable for much of the past six months as investors redeploy capital into other markets such as Poland, Mexico and Europe.
On May 1 the dollar closed in Sydney at $US 1.0367, on Saturday morning our time, it ended at 97.30 USc. That’s a drop of around 6%, with much of it coming from May 6 onwards.
And that has probably been enough to take the pressure off the Reserve Bank for another rate cut for a while. The fall in the currency is why we shouldn’t expect a rate cut at the June board meeting, or for quite a few months after that.
AUDUSD – May Free Fall
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The Aussie dollar isn’t falling because of problems in Australia – it is the result of the firming in the value of the US dollar.
And that is in turn due to a falling deficit for the US Government, rising output of oil and gas, which is depressing domestic prices and easing inflation, and continuing evidence that the US economy is doing OK, even if it has softened a little in the past six weeks or so.
And the continuing strength in the US dollar is making it tough for gold. It has now fallen for the last seven trading days, shedding $US109 an ounce on the New York futures market where it ended Friday’s trading session down $US22.20 to $1,364.70 for the June contract on Comex.
Gold has wreaked havoc on the prices of gold miners and exchange trade funds, and on gold bugs generally. The rush to buy physical gold after April’s big falls has petered out this month.
But a bigger influence on the value of the dollar and gold, and the markets will be the appearance by Federal Reserve chairman Ben Bernanke before the US Congress’ joint economic committee on the US economic outlook on Wednesday night our time.
Markets are waiting for him to say more about any plans the central bank may be forming for a slowing (or ending) of its $US85 billion a month of easing spending. The Fed’s easing program remains the biggest influence on financial markets.
The Fed’s easing spending is helping boost markets of all kind – with the growing exception of commodities, such as gold and copper which are taking their line from worries about slowing global growth, especially in China.
But the similar move by the Bank of Japan is adding more liquidity to markets to play with, and there are definite signs the Japanese economy has already responded to the positive moves from the government and the Bank of Japan.
It’s that spending and those concerns about China’s growth outlook which is weakening support for commodities, along with low inflation across the globe which have combined to be a major immediate influence on our market.
Despite gold’s gloom and the lower dollar, Wall Street’s strong finish on Saturday morning our time means that the local market will start with a modest gain after the Share Price Index ended up 19 points.
The Dow added 121.18 points, or 0.8% to close at a record 15,354.40. The S & P 500 Index rose 15.65 points, or 0.95%, to end at a record 1666.12 and the Nasdaq climbed 33.72 points, or 1% to finish at 3498.97 – its highest close since October 2000.
For the week, the Dow advanced 1.6%, the S&P 500 climbed 2% and the Nasdaq rose 1.8%. For the year so far, the Dow is now up 17.2%, while the S&P 500 is up 16.8% and the Nasdaq 15.9%.
Gold though is off 18% this year and nearly 30% from its September 2011 peak.
Our market lost half a percent on Friday and for the week with the ASX 200 index ending at 5,180.8. While US sensitive stoics such as QBE made ground last week (up 5.7%), gold sensitive shares such as Newcrest took another pounding, losing more than 15% in value. Friday’s gold price fall will mean another weak start for Newcrest this morning.
Fortescue shed 10%, BHP Billiton 1% (relative over performance to the sector) and Rio Tinto was off more than 5%.
Downgraders such as UGL lost 22%, Worleyparsons (on Friday) dropped 18.5% and Sedgman lost 18%.
The banks all had small gains except the Commonwealth which jumped 3.7% after a solid third quarter update.
Looking at other markets, German’s Dax hit a new high of 8,398 points to end the week up 1.4% and the year so far, 10%. In Asia, Tokyo’s Nikkei index added 0.7% for the week to be up a massive 46% so far in 2013 and is the main driver for the 11% rise for the MSCI Asia Pacific index.
China’s Shanghai Composite Index rose 1.6% last week to trim the loss for the year from the February peak to 6.2%.
