With the closures of three US banks, and Credit Suisse on the verge of shutting down, the global banking industry is under critical scrutiny of the markets. Troubles and concerns have multiplied as Silicon Valley Bank failed to find a buyer, while there are no assuring developments on much needed funding required to keep Credit Suisse afloat. Protective liquidity being added by the Federal Reserve to support the needy banks is weighing the Dollar Index down. Dollar woes have worsened on sharply falling US treasury yields as traders flee the risk assets to take refuge in the safe haven of the government bonds.
Softer than expected US PPI, retail sales, University of Michigan consumer sentiment data are favourable for the gold bulls. University of Michigan one-year consumer inflation expectations fell short of expectations as preliminary data for March came in at 3.8% as against the forecast of 4.10%.
As the banking industry concerns roil the markets amid soft US data, investors are betting that the US Federal Reserve will be forced to change its take to become dovish from aggressively hawkish so as to support the beleaguered financial system. Markets aren’t pricing a 25 bps hike fully at the next March 21-22 FOMC meet. In fact, markets are looking for a rate cut as early as in July.
Dollar Index was 0.70% lower on the week as the Index closed at 103.52, while 10-year yields tumbled nearly 8% as the ten-year yields settled at 3.438%.
In the present scenario, gold can easily move past $2000 level on heightened concerns about the stability of the banking system. However, critical analysis of some of the factors show that gold bulls are probably overreacting to the situation. Despite all the doomsayers pushing forth their doomsday narrative, ten-year US yields haven’t breached the cycle low of 3.34%. Interbanking lending spreads don’t betray any worrisome situation. The Japanese Yen barely breached its cycle low of 132.28 made on March 13. S&P 500 Index closed nearly 1.50% higher on the week.
Although concerns about the health of the banking industry are justified, the gold rally is like the great financial crisis of 2008. Present US banking crisis is more about liquidity and poor risk management rather than a systematic crisis. Credit Suisse has been in trouble for quite some time. It is not about the sector as a whole.Gold may find it difficult to sustain this exaggerated rally should this crisis become all about specific cases only.
As the European Central Bank hiked rates by 50 bps, though with some deliberation, the message is clear: inflation control is the priority for the Central Bank. Similarly, the US Federal Reserve is unlikely to be dovish at the upcoming March FOMC meet. In addition, being dovish will send a wrong signal to the markets.
Support is at $1960/$1937. Resistance is at $2000/$2025.
(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)