Soft US jobs data may push Gold to Rs 74000; check today's trading strategy

A soft US nonfarm payroll report will be positive for gold as it will increase the possibility of a rate cut happening as early as in July

Gold - Up as the central banks cut rates

Performance:

Spot gold rallied on Thursday as the European Central Bank cut the benchmark rate by 25 bps. The rate cut was widely expected, though the Central bank has not given any clear guidance on future rate cuts. Nonetheless, considering the fact that the Bank of Canada has cut its benchmark rate on Wednesday, which has been followed by the ECB, traders are now hopeful that the US Federal Reserve will follow the suit sooner than later, more so as most of the recent US data have been disappointing.

Spot gold was trading with a gain of 0.68 per cent at $2372 at the time of the MCX closing. The MCX August at Rs 73,123 was up 0.83 per cent.

Data and event round up:

US ISM services (May), released on Wednesday, came in at 53.80 versus the forecast of 51; ISM services prices paid were noted at 58.10 as against the forecast of 59; new orders at 54.10 was in expansion zone and topped the forecast of 53.20.

Although the ISM services data was better-than-expected and it showed that the US services sector only briefly slipped into contraction zone in April, the ADP data, precursor to the US nonfarm payroll report to be released Friday, came in at 152k; thus, fell short of forecast of 175k.

US data released on Thursday showed that the initial jobless claims in the week ending June 1 jumped to 229k from 221k, whereas unit Labor cost (first quarter final estimate) at 4% was well below the estimate of 4.90 per cent due to reduced hours and weaker output.

The European Central Bank cut the key deposit rate by 25 bps to 3.75 per cent after holding it at 4 per cent for nine months. The ECB assessed that the inflation outlook has improved markedly; however, the central bank will adopt a meeting-by-meeting approach for the future policy decisions.

The Euro did not fall despite the rate cut on lack of forward path and the ECB upgrading its inflation forecasts to 2.2 per cent in 2025, up from 2 per cent before. In addition, the Bank lifted this year's economic expansion forecast to 0.90 per cent from 0.60 per cent.

Yields and the Dollar Index:

The US Dollar Index was at 104.17, down 0.17 per cent on the day, as the US ten-year yields at 4.28 per cent were largely steady.

ETF holdings:

Total known Global gold ETF holdings stood at 80.93 Moz, which is slightly higher than the last week's level of 80.811 Moz.

Central Bank - gold buying continues:

As per the World Gold Council, April was a month of healthy gold buying by the global central banks as they bought net 33 tonnes in April. China's central bank bought just under 2 tons of gold. Turkey’s Central Bank was the largest buyer with 11 tonnes of gold.

Chinese buying gold:

Chinese investors have been piling into international gold as onshore prices are in a premium. In addition, shaky real estate markets and concerns about Chinese Yuan weakness are also supporting the buying momentum in China.

Yield and Dollar:

The US Dollar Index continues to be in a firm downtrend. The Index was at 104.21, down 0.04 per cent, at the time of the MCX closing, whereas the ten-year US yields were up at 4.30 per cent.

Upcoming data:

The US nonfarm payroll report to be released Friday will be crucial for the metal. Going by the ADP data, the report is likely to be somewhat weaker than expected.

Outlook:

Spot gold is expected to range trade ahead of the key nonfarm payroll report.

A soft US nonfarm payroll report will be positive for the metal as it will increase the possibility of a rate cut happening as early as July. In that case, the metal is expected to take a shot at the psychologically important level of $2,400.

Support is at $2,350 (Rs 72,400)/$2,340 (Rs 72.100) /$2,315 (Rs 71,300), while resistance is at $2,380 (Rs 73,400) /$2,400 (Rs 74,000/$2,450 (Rs 75,500). 


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Disclaimer:Praveen Singh is Associate VP, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas. Views expressed are his own.