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Gold Tumbles Below $1230

Daily Analysis - 07/03/2017

US Rate Hike Outlook Turns Sentiment Bearish

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Following the sharp rally on Friday, gold prices tumbled below the key support level around the $1230-mark as investors moved out of the safe haven metal amid the increased likelihood of a US interest rate hike as early as this month. Fed fund futures indicate the market has now completely priced in a March rate increase.

Geopolitical Tensions Provide Temporary Precious Metals Floor


Amid the downturn in gold prices, a floor has emerged for the time being as geopolitical uncertainties, including North Korea’s latest sabre-rattling, prevented the market sentiment from turning entirely bearish. However, the growing tensions in Asia have thus far been unable to dislodge the more hawkish outlook for US monetary policy.

When considering the more hawkish backdrop and jawboning from Central Bank officials, the only remaining piece of data that could undo the high likelihood of rising rates is a weak nonfarm payroll figure on Friday.  Typically, higher interest rates translate to US dollar strength, weighing on gold, especially US dollar-denominated prices. The next key level to watch out for on the downside is $1225 per troy ounce. If prices fail to remain high, expect a fresh bout of selling.

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Euro Area Investor Sentiment Hits 10-Year High


Investor morale in the Eurozone has improved markedly more than expected, hitting its highest level in close to 10 years in March, dissipating fears of a sudden reversal in the economic recovery.  Data from a poll conducted by Frankfurt-based research group Sentix showed that Investor Confidence, which measures the six month outlook among investors in the currency bloc, jumped to 20.7– the highest reading since August 2007.

The figure was well above the consensus estimate of 18.5 while the uptick in confidence further reinforces last week’s PMI surveys that showed substantial expansions across all sectors within the region. After February’s slip to 17.4 from January’s 18.2 print on the back of concerns that US President Donald Trump's protectionist policies could hurt global growth, the latest poll is adding to a more upbeat outlook. EURUSD, after declining for most of last session, has found support around the 1.0570 level.

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Canada Flashing Early Crisis Signs


Canada’s elevated debt levels make it among the most vulnerable to a financial crisis, one of the world’s top banking authorities warned late Monday.  The Bank for International Settlements, in its latest quarterly review, said Canada is flashing early warning indicators for a domestic banking crisis. Canada’s credit-to-GDP gap increased to 17.40% - well above the BIS threshold of 10.00%. The report said that two-thirds of all past banking crises showed credit-to-GDP gaps that broke above the 10.00% threshold in the three years preceding the event.

The buoyant Canadian housing market has primarily been fuelled by the growing amount of household debt. Increasingly, questions are been asked about the ability of those consumers to handle their debt burdens when interest rates rise from record lows. Following yesterday’s rally, USDCAD is down in early Tuesday trade, trending just shy of 1.3390.

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Return of Yen Volatility Could Hurt Japanese Recovery


Large swings in the Yen could derail the recent economic recovery as they have the potential to hit business sentiment, Bank of Japan Board Member Takako Masai remarked earlier in Zurich.

The Yen saw a sharp rise in volatility in 2016, which made it difficult for Japanese exporters to do business. Any such spike now could have a negative impact on business, Masai noted. In further comments, she stated that risks have subsided compared to the second half of 2016, as the tightening jobs market helps support household consumption. Nevertheless, given that wage growth still lacks momentum, the BoJ remains committed to continuing its large-scale government bond purchases in attempt to target yields. USDJPY is stuck within a tight trading range, with the pair currently perched close to the upper ceiling at 114.500.

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