Morning Notes — Dollar, Gold and Stimulus

Dollar: The recent decline in the dollar mostly stems from a perceived growth and policy differential between the US and Europe. Part of the perception was due to July coronavirus trends in the US vs Europe. Just weeks ago, it seemed the US was the only country dealing with a significant rebound in case counts. Some of that perception changed this week, but Eurozone July flash PMIs still implied better growth than the US. And the Eurozone’s massive policy response is largely finished for the time being, while Washington is preparing more fiscal stimulus and the Fed looks to adopt incremental action at its September meeting.

Reasonable: Gold is priced in dollars, so the recent run in Gold prices also makes sense given the dollar decline this month. The US/Europe coronavirus dynamic may be shifting a bit and we’d expect a less obvious dollar trend if that continues. But, we don’t need a bullish dollar outlook to be skeptical of higher prices for Gold. In the near term, momentum and positioning dynamics can carry the Gold rally further, but it’s getting more difficult to construct a bullish fundamental view given economic cycle dynamics (Gold tends to rally at the end of an economic cycle and started its recent run in January) and a reasonable outlook for US 10-year real yields. ‘Real’ means adjusted for inflation. To be bullish on Gold prices from these levels, you need to see nominal yields fall to zero or negative territory and you need to see inflation rise. That could happen, but it requires a lot of things coming together with low probabilities of outcomes. It’s almost requires a ‘perfect storm’, which in itself, may be an attractive characteristic for many investors.

FYI: The further we go into August without a fifth fiscal relief bill, the greater the potential market volatility as investors consider the potential for more lasting economic impairment. Markets may also have difficulty ignoring the ‘stalled’ economic recovery if the July US ISM data (manufacturing on Monday 8/3 and non-manufacturing on Wednesday 8/5) slows materially from June. And the most important US economic number this week was yesterday’s higher than expected jobless claims data, which introduces the possibility for a disappointing July Jobs Report on Friday 8/7.