The attached note looks at the surge in the gold price to a record high along with the related fall in the US dollar and rise in the Australian dollar. The key points are as follows:
- The US dollar looks to have peaked in part reflecting reduced safe haven demand with more downside likely.
- The gold price has broken out to a record high reflecting a declining US dollar, investors demand for an inflation hedge and a fall in the opportunity cost of holding gold. More upside is likely.
- The Australian dollar has broken higher reflecting the declining US dollar, along with higher commodity prices and its likely the trend will remain up.
The price of gold has now broken out to a record high and the Australian dollar has risen 30% from its coronavirus panic low in March and broken above $US0.70. What’s driving this and what does it mean for investors? This note looks at the main issues.
The US dollar looks to have peaked
The recent surge in gold and the Australian dollar have one thing in common – namely an emerging breakdown in the US dollar. The $US surged during the early phase of the coronavirus panic in response to safe haven demand. The US economy has less exposure to cyclical sectors (like manufacturing, materials and financials) and a greater exposure to growth sectors like IT & health (that benefit from coronavirus) compared to the rest of the world. This means capital flows into the US when global growth slows and back out again when it picks up. Right now, the $US looks to be breaking down.
Source: Bloomberg, AMP Capital
From its March coronavirus panic high the US dollar index has fallen 9%. There are several reasons why the US dollar has likely peaked and will decline over the next six to 12 months.
- First, the gap between US and global interest rates has now collapsed as the Fed has cut rates to zero making the US dollar less attractive to investors.
- Second, the trade weighted US dollar has become expensive based on relative price levels (or what is often referred to as purchasing power parity).
- Third, the Fed has been relatively more aggressive in its quantitative easing program than many other central banks which has increased the relative supply of US dollars.
- Fourth, the Eurozone seems to be getting its act together relative to the US in terms of fiscal stimulus which makes the Euro (the main anti-dollar) relatively more attractive.
- Fifth, a recovery in global growth (albeit a faltering one given the ongoing threat from coronavirus) is likely to hurt the US dollar reflecting the relatively lower cyclical exposure of the US. In other words, safe haven demand for the US dollar is likely to recede. This may be accentuated by the US’ relatively poor control of coronavirus.
- Finally, for the technically minded, in early July the US dollar registered a so-called death cross with the 50-day moving average falling below the 200-day moving average. It’s also seen a double top with its late 2016 high