Dollar Supported by Higher Crude Prices and T-Note Yields
Holding money bunched in fist by Iana Miroshnichenko via iStock The dollar index (DXY00) is up +0.11% today and is just below Monday’s 1.5-week high. Today’s +1% rise in WTI crude oil prices raises inflation expectations and could persuade the Fed to tighten monetary policy, which supports the dollar. Also, today’s increase in the 10-year…
Holding money bunched in fist by Iana Miroshnichenko via iStock
The dollar index (DXY00) is up +0.11% today and is just below Monday’s 1.5-week high. Today’s +1% rise in WTI crude oil prices raises inflation expectations and could persuade the Fed to tighten monetary policy, which supports the dollar. Also, today’s increase in the 10-year T-note yield to a 19-year high of 5.04% strengthens the dollar’s interest rate differentials. In addition, expectations that the Fed will raise interest rates by 25 bp at the Tue/Wed FOMC meeting support the dollar. The dollar fell from its best level today after the Sep Empire manufacturing survey came in weaker than expected.
The US Sep Empire manufacturing survey of general business conditions fell -13.0 points to 7.6, weaker than expectations of 15.0.
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Markets are pricing in a 94% chance of a +25 bp Fed rate hike at the Tue/Wed FOMC meeting.
EUR/USD (^EURUSD) is down by -0.03% today and is just above Monday’s 1-month low. The dollar’s strength today is weighing on the euro. Also, today’s +1% increase in crude oil prices is a negative factor for the Eurozone economy, which is heavily dependent on imported oil.
The euro found some support today after the German Sep ZEW survey expectations of economic growth rose to a 7-month high. Also, today’s increase in the 10-year German Bund yield to a 17-year high of 3.57% strengthens the euro’s interest rate differentials.
The German Sep ZEW survey expectations of economic growth rose +0.5 to a 7-month high of 34.7, although weaker than expectations of 40.0.
The markets are discounting a 67% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.
USD/JPY (^USDJPY) is up by +0.41% today. The yen slid to a 1-week low against the dollar today. The yen came under pressure today after a report said the Japanese government is considering a new defense spending target of 3.5% of GDP, which could boost government debt issuance to fund the increase and is bearish for the yen. Also, today’s +1% rally in crude oil prices today is bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy. In addition, higher T-note yields today are weighing on the yen.
Yen losses today are limited after the July tertiary industry index rose more than expected. Also, today’s jump in the 10-year JGB bond yield to a 30-year high of 3.04% has strengthened the yen’s interest rate differentials.
The Japan July tertiary industry index rose +0.4% m/m, stronger than expectations of +0.3% m/m.
The yen has some carryover support from last Tuesday, when the Japanese health minister, who oversees the Government Pension Investment Fund (GPIF) that holds $2.1 trillion in assets, said the fund is still considering whether it needs to review its asset allocation. The recent jump in the 10-year Japanese JGB government bond yield to a 30-year high has fueled speculation that the GPIF may boost its allocation to Japanese government bonds, which would support the yen.
The yen is supported by strong expectations of a BOJ rate increase this week. Markets are pricing in a 99% chance of a +25 bp BOJ rate hike at Friday’s policy meeting. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak.
December COMEX gold (GCZ26) is down -19.10 (-0.44%) today, and December COMEX silver (SIZ26) is down -0.068 (-0.11%).
Precious metals prices are moving lower today. Dollar strength today is bearish for metals prices. Also, soaring global bond yields are negative for precious metals after the 10-year T-note yield rose to a 19-year high, the 10-year German Bund yield rose to a 17-year high, and the Japan 10-year JGB bond yield rose to a 30-year high. In addition, today’s +1% increase in crude oil prices raises inflation expectations and could persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals. Finally, expectations that the Fed will raise interest rates by 25 bp at the Tue/Wed FOMC meeting and the BOJ will hike rates by 25 bp at Friday’s meeting are weighing on precious metals.
Losses in silver prices are limited today on signs of stronger Chinese industrial metals demand after China’s Aug. industrial production rose +5.2% y/y, stronger than expectations of +4.8% y/y.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.25-month high today. Long holdings in silver ETFs rose to a 5.5-month high on August 25.
Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China’s PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC 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
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