Last week, every major central bank had something to say.
As a result, macroeconomics and monetary policy drove markets.
First up was the Reserve Bank of Australia, which decided to cut interest rates by 25 basis points last Tuesday from 3.75% to 3.5%.
A few hours later, Mark Carney and the Bank of Canada announced the overnight lending rate in our country would remain unchanged. This wasn’t a surprise, as few economists, if any, expected a rate increase. However, in the statement that accompanied the decision, Carney said, “The outlook for global economic growth has weakened in recent weeks. Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.”
We continue to believe interest rates will not rise in Canada until 2013.
Last Wednesday, the European Central Bank left interest rates unchanged, which disappointed some investors as the market had been looking for either a rate cut or a hint that one could materialize soon.
Finally, on Thursday we had a triple whammy of Central Bank news as the Bank of England decided to keep interest rates at 0.5%, the Chinese surprised some investors by cutting interest rates for the first time since 2008 by 25 basis points to 6.31%, and Fed Chairman Ben Bernanke testified before a Congressional Committee.
The market was expecting Bernanke to drop a hint that further quantitative easing was on its way, but he didn’t and gold prices fell as a result. What confused the market further was that comments from other members of the Federal Open Market Committee had been interpreted to suggest earlier in the week that more accommodative policy was a distinct possibility.
As noted, gold had a bumpy ride this week falling off the highs reached last Friday thanks to the comments from Bernanke, WTI crude oil prices didn’t move a great deal by the end of the week, and the Canadian dollar managed to gain about a cent, closing around the US$0.97 level.
QE or no QE?
So with Central Banks moving to the forefront over the past couple of weeks, it’s not surprising to see gold prices used as a proxy for potential moves in monetary policy.
To understand this, all we have to do is look at the price of gold over the past few days. Gold prices had recently been in a slump as investors thought the likelihood of a third round of quantitative easing, or QE3, from the Federal Reserve was unlikely after the first quarter of 2012.
However, after a relatively disappointing U.S. employment report last Friday, gold prices jumped almost US$85 per ounce intraday as the market increasingly believed that the Federal Reserve would have to step in soon to stimulate the U.S. economy by providing more liquidity.
Such action would result in the printing of more money, which would have weakened the U.S. dollar and strengthened gold prices. However, on Thursday, gold prices fell US$50 intraday after Ben Bernanke’s speech to a Congressional Committee did not suggest that new QE3 policies would materialize in the immediate future.
Click through below to read about the trading week ahead.