Thursday, August 8, 2019

Three central banks announce rate cuts, while gold and silver surge to year highs

  • Dollar
  • Gold
  • Euro
  • AUD
  • NZD

Market recap: The new trend of global rate cuts deflate currencies, and the prospect of a hard Brexit continues to cause market jitters

New Zealand, India and Thailand’s central banks surprised the market yesterday by announcing larger-than-expected cuts to their interest rates, a continuation of the recent trend of global rate cuts and monetary policy easing.

The Reserve Bank of New Zealand (RBNZ) cut the country’s official cash rate (OCR) to 1% from 1.5%. RBNZ governor Adrian Orr sent an extremely dovish message to the market, claiming that negative rates are a possibility and that short-term growth will remain reasonably subdued. The market fell by almost 200 points and broke its previous support level of 0.6420.

The Reserve Bank of India cut its rate by 35 basis points for a fourth straight meeting this year, while the Bank of Thailand unexpectedly cut its rate by 25 basis points for the first time since 2015. All three central banks also made clear their concerns regarding the outlook of economic growth, along with growing fears that the trade war will last even longer.

Yesterday’s other main market spotlight fell firmly on Brexit. Officials in Brussels have been quoted as claiming that the European Union will refuse to agree to UK Prime Minister Boris Johnson’s demand to remove the Irish backstop (the insurance policy to avoid a hard border in Ireland) from the withdrawal deal negotiated with former UK PM Theresa May.

The EU has stated it will not change its position and will not negotiate mini-deals with the UK, but yesterday, the country’s Foreign Secretary Dominic Raab remained upbeat, claiming: “We will leave at the end of October and are determined to make a success of it.” Raab explained that the UK government believes the EU’s reluctance to change the terms of the deal arranged by May means the prospect of the UK leaving the EU with a deal is much more difficult. Sterling as a result continues to float, with a range of 1.2080-1.2210’s level in the past seven days.

Meanwhile, Asian stock markets rallied this morning as China reported better trade numbers while also limiting the fall of its yuan; offering temporary relief for those fearful of a global currency war.

Today’s analysis: Chaos continues to surround Brexit; gold and silver to continue to rise?

Boris Johnson is expected to meet other EU leaders at the G7 Summit in Biarritz, France, at the end of this month, but at the moment, both sides seem to be preparing for a hard Brexit. The EU is adamant the UK must accept the deal agreed by Theresa May, yet Johnson and Raab have reaffirmed their belief that the country will leave the European Union one way or another on October 31st, even if it results in a no-deal.

But what if Johnson changes his mind and looks to delay Brexit once more? Two factors could influence such a decision. The first is if a no-confidence motion in Johnson and his cabinet is called by the ruling Conservative Party’s main opposition, The Labour Party. The earliest that Labour leader Jeremy Corbyn could call such a vote is September 4th and the possibility of such a vote grew closer after the Conservatives lost a by-election seat last week in Brecon and Radnorshire to the Liberal Democrats, meaning the UK government’s parliamentary majority has been reduced to just one seat. It’s been called a, “major blow” for Johnson’s new cabinet, and means it could be even harder for the new PM to get a Brexit deal, a no-deal, or any other legislation for that matter, passed by Parliament. A no-confidence motion could see Sterling drop further from its current level as uncertainty around the government and a hard Brexit continue.

If there’s no motion for a vote of no-confidence, Johnson has the option of calling a general election before the October 31st deadline, in a bid to increase his majority in Parliament. But there’s another crucial factor at play here – Parliament is current on recess until September 3rd, meaning Johnson has even less time to negotiate a new deal, or plan for a hard Brexit or general election, which may pressure Sterling to fall even further.

With fears continuing to grow regarding the ongoing trade war, plus a negative outlook regarding global economic growth and rising concerns over Brexit, gold and silver - two safe-haven-assets and tools that are resistant to inflation - surged to a year high again yesterday. Gold’s price reached US$1,500/ounce and it’s expected that both precious metals can rise again in the mid-long term when European central banks and the Fed continue their rate cuts in the near future.