Direxion Shares Exchange Traded Fund Trust (JNUG): How Will Central Banks’ Recent Actions Play Out in the Gold Market?
Last week was really hot in central banking. Everyone focuses on the Fed, but other major central banks also held their monetary policy meetings. What can we learn from them?
There was a flurry of central bank meetings last week, but major central banks remained reluctant to follow the Fed’s hike. Let’s start with the Bank of Japan, which kept policy on hold early Thursday. Although the BoJ noted that the economy was in a moderate recovery trend, it kept its short-term interest rates at minus 0.1 percent. It also maintained the cap on 10-year bond yields and the asset purchase program at about ¥80tn a year.
That decision means that the BoJ stuck with its ultra-loose monetary policy, despite the Fed rate rise. Hence, that decision underlines the global divergence in monetary policies among central banks. The Fed is definitely more hawkish, which should strengthen the U.S. dollar against the Japanese yen in the long run – it is bad news for the gold market.
Other central banks also kept their interest rates on hold. In particular, both the Bank of England and the Swiss National Bank voted to hold interest rates unchanged (there was one dissent at the BoE meeting) – it means that the SNB retained its negative interest rates, while the BoE left the bank rate at a record low of 0.25 percent, set after the Brexit vote. And Norges Bank, i.e. the central bank of Norway, maintained its key policy rate unchanged at 0.5 percent.
The only exception among these doves was the People’s Bank of China, which increased the rates it charges in open-market operations by 10 basis points and on its medium-term lending facility just a few hours after the Fed’s move. It’s not a big shift, but it indicates that either Beijing wants to hit the brakes or to stabilize its currency.
The take-home message from the last fiery week in central banking is that the divergence among central banks widened. The Fed hiked the third time, while other central banks kept their interest rates unchanged. It means that the U.S. central bank is outpacing its global peers, which should provide support for the greenback in the long term, being a headwind for the yellow metal. However, the waning expectations of Trump’s fiscal stimulus – and the decline in stocks – are now an important bullish driver for gold prices.