The dollar index (DXY00) on Tuesday fell by -0.12%. Tuesday’s -3% plunge in WTI crude oil prices to a 7-week low lowered inflation expectations, which could prompt the Fed to pursue easier monetary policy, a bearish factor for the dollar. Also, lower T-note yields on Tuesday weakened the dollar’s interest rate differential, which was negative for the dollar.
The dollar recovered from its worst level on Tuesday amid better-than-expected US economic news. The Apr trade deficit eased to -$55.9 billion from -$56.6 billion in Mar, narrower than the -$56.1 billion expected. Also, May existing home sales rose +3.2% m/m to a 5-month high of 4.17 million, stronger than expectations of 4.07 million. In addition, Tuesday’s stock slump boosted liquidity demand for the dollar.
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President Trump on Tuesday predicted a swift end to the war with Iran and a subsequent fall in oil prices, and said, “We’re in the final throes of what will be a very, very good deal, and that they could have at least an idea one or two days from now” about the deal.
The swaps markets are discounting the odds at +3% for a +25 bp rate cut hike at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Tuesday rose by +0.10%. The euro moved higher on Tuesday amid a weaker dollar. Also, an as-expected increase in German Apr industrial production and better-than-expected German Apr trade news were supportive for the euro. In addition, Tuesday’s -3% fall in crude oil prices is positive for the Eurozone economy and the euro as Europe imports most of its energy.
German Apr industrial production rose +0.4% m/m, right on expectations and the biggest increase in five months.
German trade news was better than expected as Apr exports unexpectedly rose +0.9% m/m, stronger than expectations of a-0.5% m/m decline. Also, Apr imports unexpectedly rose +1.2% m/m versus expectations of a -2.0% m/m decline.
The markets are discounting a +100% chance for a +25 bp rate hike by the ECB at Thursday’s policy meeting.
USD/JPY (^USDJPY) on Tuesday rose by +0.15%. The yen fell to a 5-week low against the dollar on Tuesday after a +2% rally in the Nikkei Stock Index curbed safe-haven demand for the yen. The yen added to its losses on Tuesday after a Wells Fargo research report said Japanese authorities are unlikely to step into the forex market to support the yen before the June 16 BOJ meeting, unless there’s a “a sharp spike in USD/JPY beyond 162.”
Losses in the yen were limited amid Tuesday’s -3% decline in crude oil prices, which is positive for Japan’s economy and the yen as Japan imports more than 90% of its energy. Also, Tuesday’s hawkish report from Nikkei is bullish for the yen as it stated the BOJ is set to raise its policy rate by 25 bp to 1.00% at next week’s policy meeting.
Japan May machine tool orders rose +37.4% y/y, the eleventh consecutive monthly increase.
The markets are discounting a +97% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.
August COMEX gold (GCQ26) on Tuesday closed down -77.00 (-1.76%), and July COMEX silver (SIN26) closed down -3.345 (-4.88%).
Gold and silver prices plummeted on Tuesday to 2.5-month lows and settled sharply lower. Precious metals gave up early advances on Tuesday and sank on the stronger-than-expected US May existing home sales report, which is hawkish for Fed policy. Also, Tuesday’s hawkish report from the Nikkei is bearish for precious metals as it stated the BOJ is set to raise its policy rate by 25 bp to 1.00% at next week’s policy meeting. In addition, expectations for the ECB to raise interest rates at Thursday’s policy meeting also fueled liquidation of long precious metal positions.
Precious metals found some support on Tuesday from a weaker dollar. Also, Tuesday’s -3% decline in crude oil prices eased inflation expectations and could prompt the world’s central banks to pursue easier monetary policies, a bullish factor for precious metals. In addition, precious metals still have safe-haven support amid the ongoing US-Iran war.
Silver prices fell on Tuesday despite better-than-expected China May trade news, a sign of economic strength that supports industrial metals demand. China May exports rose +19.4% y/y, stronger than expectations of +15.0% y/y. Also, May imports rose +27.4% y/y, stronger than expectations of +26.0% y/y.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.5-month low on March 31 after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 10-month low on Monday after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China’s PBOC reserves rose by +320,000 ounces to 74.96 million troy ounces in May, the largest monthly increase in 17 months, and the nineteenth consecutive month the PBOC has boosted its gold reserves.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
