Daily Interest rates in focus

Daily Analysis - 20/08/2019

Markets are trendless in anticipation of this week’s interest rate deliberations

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The world’s traders are sitting mostly on their hands this week. Major world indices are directionless with movements in the European indices ranging between about a third of a percent to slightly above 1% and the US indices showing a bit more vigor ranging from around ½ a percent to around 2%.

This is largely explained by two variables. First three major world economies are announcing their deliberations on the interest rates they are going to adopt. And if that were not enough focus on big economy monetary policy, this weekend brings the annual Central Bankers’ hoe down at Jackson Hole, Wyoming.

Markets anticipating rate increase


Two of the three US markets closed up yesterday with the Dow Jones Industrial average closing even and the S&P 500 as well as the NASDAQ both gaining slightly. The perpetual depressant, the Nikkei was, true to form, down as the European indices are truly directionless with the FTSE down and the DAX, CAC MIB and Ibex up though hardly in a runaway fashion. This mixed directionality of the different markets around the world is indicative of uncertainty. There is no obvious direction traders are taking and therefore we have some markets up and some down. A common thought on this phenomenon is that traders are waiting for results of the announcements this week, in order to see whether their anticipation of further stimulation in the form a reduction in the cost of cash (interest rate) materializes or evaporates.

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Gold is weakening


To throw this anticipatory indifference into further relief, the price of gold has been retreating this week from its high of over $1545 per troy ounce to under 1500 at press time today. This is a reliable sign of the anticipation of further interest rate reductions as the opposite case, where no reductions were anticipated, would likely indicate the presence of some inflationary pressure and therefore an increased demand for gold, which would drive its price up.

Spot gold is at $1,498 per ounce at press time while U.S. gold futures fell 0.7874% to its current price of $1,512.10 an ounce.

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USNDX Up


The US dollar Index, a trade weighted index of a basket of seven industrialized economic zone currencies against the US dollar is rising, in what may foreshadow a no rate cut at all. This would be the likely market reaction where the interest rate in the US NOT to be reduced. It could have the effect of attracting further demand for the US currency as it would be paying a higher rate of interest than its trading currency competitors. Called the “carry trade” it is a simple, relatively safe and widely practiced trading strategy of simply placing your capital in the currency that pays the highest rate of interest and do nothing with it at all but let it collect that interest. The dollar could indeed strengthen should the central bankers hold firm and not reduce rates.

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