Shining gold and rising Euro

Globally the stock markets are giving a mixed cue. The Dow Jones ended in a slight green yesterday. The Hang Seng and Shanghai are up while the Nikkei is down in the morning trade. The signal from the currency market looks much more pronounced as the dollar has retreated with the Euro and Pound Sterling gaining a fair bit of ground. The Dollar Index trades at 95.13 which is its lowest level since mid-March. The Euro is trading at 1.1530 which is its strongest level since Feb 2019.

One factor which has played in the favour of the Euro is the conviction shown by the Eurozone leaders in approving a relief package for Corona-hit countries. The Euro 750 bn package, with a substantial portion as grants, will go a long way in ensuring that the block remains united. We wrote extensively about the formation of the block yesterday and the kind of inherent existential contradictions which the block faces on almost a daily basis. The criticism that the 27 countries often don’t come together for a common cause, which leads to endless delays in forming and implementing policies, is often rightly placed. But in the current situation with PEPP and now the relief package, it has shown that the block is ready to speak in one voice. Contrast this with the tussle between the democrats and republicans in the US where the law makers are not able to decide about the quantum and nature of relief extension, and the differences becomes glaring. The Trump statement in the press conference that “The Corona pandemic is going to get worse before it gets better” has also not helped the dollar cause. 

But leaving the Euro, other news which demands our attention is the gold price. The spot gold is now trading at 1855 $/oz which is its highest level since 2011. Gold, unlike silver which is also in a tearing hurry to form new highs, doesn’t have much industrial use. Gold, since time immemorial, has been used as a store of value and gives a competent hedge against the devaluation of fiat currencies. Now we are not sure whether the current rally has its genesis in the fear of fiat melt down but we have seen that the gold rise often coincides with the rally in safe havens. The safe haven play generally sees dollar rises, Yen rises , Stocks and EM currencies dive down. This time round we are not seeing the safe haven script playing out.

Domestically, the rupee is trading strong against the dollar by close to 10 paise in the morning trade today. Yesterday it closed around 74.74 levels. The strength is in line with the other EM currencies. On the bond side the 10 year benchmark bond is trading at 5.82. Yesterday, after an unnamed government official commented that there can be an increase in borrowing in case the tax revenues shortfall persists, we witnessed the yields moving right. The bond market though keenly awaits the next MPC due in the first week of August.