Gold corrected in overseas trading on Tuesday, weighed by a modestly firmer dollar and an overbought condition that had developed recently. However, the uptick in the greenback was short-lived and the yellow metal has already retraced about half of the pullback.
The dollar index fell back below 80.00 to plumb the eight-week lows after the February Empire State Index and the NAHB homebuilder sentiment index both missed expectations by significant margins. Additionally, TIC data revealed that foreign investors dumped a whopping $119.6 bln in net U.S. assets in December, including $45.9 bln in long-term assets. Outflows accelerated in December, versus November, as the Fed commenced tapering.
Committed To The Taper
I trust you can see the conundrum the Fed faces: There has been ample evidence that the tepid economic recovery is faltering, yet the Fed is for the time being committed to the taper. As the Fed reduces asset purchases, foreign appetite for those same assets has dropped simultaneously. This all threatens to keep upward pressure on yields, which could derail the recovery entirely.
Of course, before that happens Yellen’s Fed would likely pause the taper. If growth risks escalate substantially, the Fed could even un-taper, boosting asset purchases once again. The market will be looking to glean any insight into what might illicit a pause or un-taper from the minutes of the January FOMC meeting, which come out tomorrow.
The BoJ's Move
Faced with mounting growth risks -- and a widening trade gap -- the BoJ boosted a couple lending facilities today. “The BOJ doubled a funding tool to 7 trillion yen ($68 billion) and said individual banks could borrow twice as much low-interest money as previously under a second facility,” according to a Bloomberg article.
The latest data out of Japan is quite a disappointment in light of the BoJ engaging in the most aggressive monetary experiment ever conceived. Today’s move by the BoJ was broadly seen as an indication that the central bank will keep their foot firmly planted on the monetary gas pedal. Additional outright asset purchases are widely expected in the months ahead as a means to offset the negative implications of a planned sales tax hike.