【Market Evening】Gold inches higher on softer U.S. dollar, Oil extends declines

Gold inches higher on softer U.S. dollar, bond yields

Gold prices edged up on Thursday, as the dollar eased and U.S. bond yields retreated from a three-week high, lifting bullion’s appeal.

Spot gold fell 0.14% to $1864.21 per ounce and spot silver rose 0.11% to $25.08 per ounce by 17:30(GMT+8).

Benchmark U.S. 10-year Treasury yields were modestly up on Thursday but retreated from a three-week high hit in the previous session, lowering non-yielding gold’s opportunity cost.

Chicago Federal Reserve President Charles Evans on Wednesday reiterated that it will take until the middle of next year to complete the Fed’s wind-down of its bond-buying program even as the central bank checks to see if high inflation recedes as he expects.

British inflation has hit a 10-year high as household energy bills rocket, bolstering expectations the Bank of England will raise interest rates in December.

The European Central Bank must be ready to rein in inflation in the euro zone if it proves more durable than forecast, ECB board member Isabel Schnabel said.

A hike in rates should reduce bullion’s appeal as higher interest rates raises the non-interest bearing metal’s opportunity cost.

Indicative of sentiment, holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose about 0.1% to 976.87 tons on Wednesday.

U.S. dollar takes breather from rally, hovers just off 16-month top

The dollar hovered below a 16-month peak in early Asian trade on Thursday, having lost ground on the pound and yen overnight as the U.S. currency took a breather while traders considered whether its recent surge was starting to run out of steam.

Sterling was at $1.3491, a one week high against the dollar having jumped 0.5% on Wednesday after a jump in Britain’s October inflation piled pressure on the Bank of England to hike rates at its meeting next month.

Against the Japanese currency, at 114.18 yen the dollar was still in sight of Wednesday’s 4-1/2-year high of 114.97, and the euro was at $1.1316, languishing near a 16-month low with markets seeing the eurozone near the back of the central bank rate-hike queue.

Strong U.S. retail sales data earlier this week added fuel to the dollar’s recent rally, which started last week after a strong U.S. inflation print bolstered market bets that the Federal Reserve will have to raise rates around the middle of next year.

The dollar index, which measures the currency against a basket of six rivals, has climbed from 93.872 on Nov 9, the day before the inflation data to 96.226 on Wednesday, its highest since mid July 2020. It was last at 95.798.

However, “the sustainability of the current dollar strength beyond the next few months looks far from certain,” said Luc Luyet, FX Strategist, Pictet Wealth Management.

“Market expectations of the Fed are starting to be particularly hawkish, suggesting limited tailwinds for the U.S. dollar going forward from that factor.”

“Furthermore, the economic growth outlook may turn more supportive of the euro as the worst of the slowdown of China’s economic activity looks mostly behind us, whereas Covid and energy import costs may prove less of an issue past winter.”

Others, however, saw a drop in the dollar as a chance to buy.

“Dips have been hard to come by lately, but anything into the low-95s looks like a buying opportunity,” said analysts at Westpac in a note.

Elsewhere, commodity currencies were hurt by oil prices, which slumped to six week lows.

The Canadian dollar was at 1.2608 per U.S. dollar, near its six week low hit a day earlier. Markets are expecting the Bank of Canada to start raising interest rates early next year.

The Australian dollar was at $0.7263, also at a six week low.

Oil at six-week low as China readies crude oil reserve release

Oil prices slid to six-week lows on Thursday as China said it was moving to release strategic reserves after a Reuters report that the United States was asking large consuming nations to consider a coordinated stockpile release to lower prices.

Brent crude oil fell 0.21% to $79.31 a barrel, while U.S. West Texas Intermediate (WTI) crude fell 0.39%, to $77.09by17:30(GMT+8).

The bid by the U.S. to shock markets, asking China to join a coordinated action for the first time, comes as inflationary pressures, partly driven by surging energy prices, start to produce a political backlash, as the world fitfully recovers from the worst health crisis in a century. read more

Brent crude was down 83 cents, or 1%, to $79.87 a barrel by 0749 GMT, after earlier dropping to $79.28, the lowest since Oct. 7.

U.S. West Texas Intermediate crude futures were down $1.13, or 1.4%, at $77.23 a barrel, having fallen earlier to $77.09, also the lowest since early last month.

Coordinated oil reserve releases "coincide with this virtual meeting between Biden and Xi Jinping. The U.S. wants to arrest inflation and China probably wouldn't mind seeing a damper on oil prices," said John Driscoll, managing director at consultancy JTD Energy in Singapore.

Prices hit seven-year highs in October as the market focused on the swift rebound in demand that has come with lockdowns to halt the coronavirus spread being lifted while the the Organization of the Petroleum Exporting Countries (OPEC) and its allies, called OPEC+, have slowly brought back supply after large cuts last year.

U.S. oil producers have also been reluctant to overspend on drilling after they were punished by investors for gorging on debt to pay for new exploration.

The International Energy Agency and OPEC have said in recent weeks that more supply will be available in the next several months. OPEC+ is maintaining an agreement to boost output by 400,000 bpd every month so as not to flood the market with supply.

"Releasing strategic stockpiles is only likely to lower oil prices temporarily," said Vivek Dhar, commodity analyst at Commonwealth Bank of Australia. "There's a good likelihood that markets have already priced in such an event."

The United States and allies have coordinated strategic petroleum reserve releases before, for example in 2011 during a war in OPEC member Libya.

But the current proposal represents an unprecedented challenge to OPEC, the cartel that has influenced oil prices for more than five decades, because it involves China, the world's biggest importer of crude.

China's state reserve bureau said it was working on a release of crude oil reserves although it declined to comment on the U.S. request.

A Japanese industry ministry official said the United States has requested Tokyo's cooperation in dealing with higher oil prices, but he could not confirm whether the request included coordinated releases of stockpiles. By law, Japan cannot use reserve releases to lower prices, the official said.

A South Korean official confirmed the United States had asked Seoul to release some oil reserves and it was reviewing the request but added that it could only release crude in case of a supply imbalance.

In its weekly stockpile report, the United States Department of Energy said late on Wednesday that crude inventories fell unexpectedly last week as refineries, enjoying profitable processing rates, ramped up output before the winter heating season.

Asian markets pull back amid slower-than-expected recovery in Japan

Asian shares mostly declined Thursday after stock indexes shuffled lower on Wall Street.

Nikkei 225 fell 0.30% to 29,598.66.

Hang Seng Index fell 1.29% to 25,319.72.

Taiwan capitalization weighted stock rose 0.44% to 17,841.37.

S&P/ASX 200 rose 0.13% to 7,379.20.

South Korea KOSPI fell 0.51% to 2,947.38.

“Without a positive lead from Wall Street overnight and a relatively quiet day in terms of economic data, sentiments in the region may be on hold, potentially leading to some sideways movement,” said Yeap Jun Rong, market strategist at IG in Singapore.

Recent government data have shown the coronavirus pandemic continues to hurt the Japanese economy. A supply crunch in chips and other parts needed to produce autos, a mainstay of the world’s third-largest economy, is one reason.

The damage to consumer spending brought on by recent government measures to close restaurants early and open theaters to limited crowds is another factor. Japan has never had a lockdown but has called periodically for a “state of emergency” to curb the spread of infections.

Junichi Makino, chief economist for SMBC Nikko Securities, said the Japanese recovery that many initially expected to begin this year may not come until fiscal 2022, which begins in April.

“But extreme pessimism is not called for. Auto production will likely get back to normal by the October-December quarter,” he said.

Investors are also watching the Bank of Korea policy-setting meeting scheduled for next week for whether the central bank will raise its key rate. Policymakers have hinted at such a move.