Currency market turmoil helps gold

Chinese yuan move rattles emerging markets and their currencies

It was a happy week for investors who had bet on gold futures in India. The MCX gold futures contract rallied to ₹27,239, up a solid 5 per cent for the week, thanks to global jitters about emerging market currencies losing sheen.

In the global market, though the dollar faced selling pressure on expectations of a postponement in rate hike by the Federal Reserve, this didn’t help the rupee. The Indian currency hit a fresh two-year low against the greenback last week following more demand for dollars from importers and a sell-off in the equity markets. The Rupee has been moving south ever since the news of PBOC letting the yuan ‘partially’ float has been out. This led to the yuan depreciating against the dollar.

The aftershocks of yuan weakening have been felt by all emerging market currencies over the last two weeks. Following China’s move to give more weight to market factors in determining the exchange rate, another country followed suit. Kazakhstan made its currency, the tenge, free-floating last week, after which the currency dropped over 20 per cent against the dollar. On Wednesday, Vietnam also announced devaluation of its currency for the third time this year.

Recent events have reduced expectations for a Fed rate hike this September, but it is expected to eventually happen and the markets are bracing for it. Investment funds which borrowed at near zero rates and invested in assets elsewhere since 2008 are now preparing to re-allocate the funds back home.

With global volatility returning, gold prices in the international markets rallied last week, helped by weak equities.

Spot gold prices ended at $1,160.7/ounce, up close to 4 per cent for the week. Platinum crossed the $1,000/ounce mark and ended the week at $1,019.5/ounce, up 2.7 per cent. Silver, however, didn’t make much gain as its demand is derived partly from industrial uses. The white metal closed at $15.31/ounce, up by just 0.4 per cent. On Wednesday, the consumer price data released in the US showed that inflation in July inched up by 0.1 per cent against expectation of a 0.2 per cent increase.

Cues to watch

US Fed meeting minutes released last week showed that more board members now see the rate hike as being imminent. Though not in September, the hike could happen before the end of the current year, this seems to be the general perception.

This puts the current weakness in the dollar and the rally in gold, at risk.

This week, US data on new home sales is expected on Tuesday, followed by durables goods orders on Wednesday. On Thursday is the crucial GDP data — the preliminary estimate of the second quarter GDP growth.

The market expects 3.2 per cent sequential growth, up from the 2.3 per cent growth reported in the advance estimate last month. If GDP numbers come out stronger, the dollar may gain. On Friday will be the release of the consumer sentiment data.

With the dollar likely to look up, Indian gold investors need to watch out on the rupee. The currency ended at 65.8 against the US dollar on Friday.

On the charts

As indicated in this column, gold prices bounced back sharply last week taking cues from a weaker dollar and delay in Fed’s rate hike. Now, at $1,161/ounce, the metal can likely move up to test the resistance at $1192.5 which is the 50 per cent retracement of the move between January high of $1302 and July low of $1077. If however, the metal is not able to breach the resistance around $1192, it may slide to $1130 and subsequently to $1100.

The MCX gold futures contract closed at ₹27,239 on Friday, up 5.4 per cent for the week. In the next few days it may attempt a move targeting ₹27,500. A breach above this level may take the contract to ₹28,200- the high hit in early part of the year. However, if rupee springs back to hold fort, the gold futures contract may inch down. On the downside, the first support will be ₹26,800.

The MCX silver contract closed at ₹36,200, up two per cent for the week. However, given the weak momentum in silver prices internationally, this contract in the domestic market too may also not gain much unless the currency weakens and gives it a leg up. The support for the contract is at ₹34,500 and the first resistance at ₹36,800.

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