28 October 2016
Terror attacks in Brussels have bolstered the safe-haven appeal of gold. Photo: Bloomberg
Terror attacks in Brussels have bolstered the safe-haven appeal of gold. Photo: Bloomberg

Gold may test US$1,280 on safe-haven demand

The terror attacks in Brussels have bolstered risk-aversion sentiment in global markets, spurring safe-haven demand for the US dollar, Japanese yen and gold.

Gold price soared nearly to US$1,260 per ounce following the attacks, before paring some of those gains.

Gold has strong support at the US$1,242 per ounce level in the short term. The yellow metal will return to upward track as long as it stays above that level. However, it still faces resistance in the range of US$1,262 and US$1,277, having failed to break above US$1,280 so far this month.

London silver price has kept rising after stabilizing at US$15.16 per ounce, and once hit US$16.13 on March 18. The uptrend will be intact as long as silver is able to stabilize above US$14.57. And it would face some resistance at the 100-week moving average of US$16.57.

The European Central Bank (ECB) saw a senior official pledging to keep interest rates at the current level for a long time or even slash the rates further. The ECB would use various tools to restore economic growth in the region. 

In the meantime, the US Federal Reserve hinted last week that there will be fewer rate hikes than expected this year. The central bank has a cautious outlook on the global economy.

The dovish tone of the Fed has surprised investors and traders who had built long positions in the US dollar earlier. The traders are now unwinding the positions.

However, dollar edged up on Monday, as many FOMC officials are upbeat on inflation prospects. That might be a sign that there is chance for a rate hike in the next FOMC meeting in April.

Atlanta Fed president Dennis Lockhart has said US economy is strong enough to support a rate hike as early as next month. His remarks have driven the dollar higher against the euro.

Technical analysis shows that the euro has strong upward momentum in the medium term. The European common currency failed to break over 1.1375 against the dollar last week. If the level is broken, the unit may extend its rally further.

The euro is likely to rise to 1.15 in the future as long as it stays above 1.08 in the coming months.

Elsewhere, Japan’s March PMI data showed that the manufacturing sector is in the middle of contraction. However, that has had limited impact on the yen.

However, the terrorist attacks in Belgium have pushed the yen to 111.36 against the dollar from 112. The range of 110 and 111 is the bottom line acceptable for the Bank of Japan.

Japanese officials resorted to verbal intervention in February when yen strengthened to that level twice. Therefore, investors could build short positions at this level.

Also, Moody’s warned Tuesday that UK’s credit rating would be at risk if the country leaves the European Union.

Sterling tumbled against the dollar on Monday as a result of heightened political uncertainties.

The so-called Brexit risk has led the sterling to a 7-year low in February. The currency might slump by as much as 20 percent if Britain opts to leave the EU.

If the UK referendum leads to Brexit, it would cost the country 100 billion pounds and 950,000 jobs by 2020, according to the Confederation of British Industry.

Meanwhile, Glenn Stevens, governor of the Reserve Bank of Australia, said the recent rally in the Australian dollar was too drastic given the outlook for commodity prices and US interest rates.

He admitted that no central bank would like to see currency appreciation at present. Aussie dollar will be kept in check until global commodity prices stage sharp recovery.

After being over-bought recently, the unit faces increasing risk of correction.

This article appeared in the Hong Kong Economic Journal on March 23.

Translation by Julie Zhu

[Chinese version 中文版]

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Sales director, Emperor Capital Group Limited; HKEJ columnist

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