The Long Arm of the Dollar

There was no winning for gold against the powerful U.S. dollar surge that came on the back of twin releases of good news for the American economy. Curious, though, was the softening of U.S. equities markets. The uptick in oil, despite dollar robustness, was a small surprise but fully explicable.

Economists surveyed by Reuters had forecast the ADP report on private-sector jobs to show a gain of 220,000 jobs. Other consensus averages were higher, ranging from 235K to 240K.

Separately, after announcing a soft-than-expected manufacturing activity report this week, the Institute for Supply Management (ISM) said its services index was 56.9 in February, up slightly from 56.7 in January. Analysts were looking for a reading of 56.5, reported a Reuters poll.

The ADP data “likely signaled strength in Friday's potentially markets-moving government jobs report for February,” said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. "What's really important now is that we get a non-farm print on Friday that comes close to that 235,000 that is expected, or higher," Sutton said. "That will keep the expectations for a Fed interest rate hike fairly near term. For the U.S. dollar that is key."

So, if labor keeps roaring, the dollar will too and gold will whimper.

Crude sank early in the day on vigorous growth in U.S. crude inventories, up 10.3 million barrels last week. That news was tempered by a Saudi statement that said prices were in the process of balancing themselves and would indeed continue to do so as the world economy continues to build muscle. The world’s biggest producer also said again that they would not cut production to bolster prices.

The oil news was augmented by a Beige Book report issued by the Fed that painted an American economy hitting on almost every cylinder. It seems the only brake on growth has been the tough winter in regions affected by the abnormally high snowfall and unusual cold. That, like most things, will pass.

A key area, shipping and transportation said that its sector grew strongly in every Fed district of the country.

Importantly, we are beginning to see the first signs of wage pressures emerge according to the Beige Book. “Skills and education” are the keynotes in the summary, which said:

“Wage pressures were moderate across most Districts, but some contacts reported increased wages to attract skilled workers for difficult-to-fill positions. In particular, service sector firms in the New York District noted increasingly widespread reports of wage hikes. Contacts in the Cleveland, Richmond, and Kansas City Districts noted increased wage pressure due to the difficulty in attracting and retaining truck drivers. A staffing firm in the Chicago District reported some companies were also willing to raise rates for unskilled workers to reduce turnover, and contacts in the Atlanta District noted increasing entry-level wages.”

This has yet to translate to higher consumer costs because of steady prices in energy that tumbled last year and early in 2015. However, as economic activity picks up and U.S. extractors remain offline, the price seems to be headed back into the high $60 to low $70 range.

We keep looking at a potential Fed rate hike as the market driver for gold in the medium to long term. So far, while the data is beginning to be supportive of such a move, it doesn’t seem quite strong enough to force Yellen and the gang to pull the trigger.

Wishing you as always, good trading,