Dollar Firms on Rising T-Note Yields and Crude Prices

The Eurozone Aug CPI rose +3.3% y/y, right on expectations and the fastest pace of increase in nearly 3 years.  Aug core CPI rose +2.4% y/y, weaker than expectations of +2.5% y/y.

The Eurozone July unemployment rate was unchanged at 6.4%, showing a slightly weaker labor market than expectations of 6.3%.

The Eurozone Aug S&P manufacturing PMI was revised downward by -0.1 to 52.7 from the previously reported 52.8.

German July retail sales unexpectedly fell by -3.4% m/m, weaker than expectations of +0.5% m/m and the biggest decline in 5 years.

The UK Aug S&P manufacturing PMI was revised upward by +0.3 to 51.7 from the previously reported 51.5.

ECB Governing Council member Martin Kocher said, “Upside risks to inflation have increased again recently.  If this picture is confirmed in the ECB’s new forecast, I believe another interest rate hike will be necessary in the near future.”

The markets are discounting a 99% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose by +0.28% on Tuesday.  The yen tumbled to a 1-month low against the dollar on Tuesday. Soaring T-note yields on Tuesday weighed on the yen.  Also, Tuesday’s +5% surge in crude oil prices to a 6-week high is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. 

Yen losses were limited on Tuesday after Japanese economic news showed the Japan Aug consumer confidence index rose more than expected to a 6-month high, and Japan Q2 capital spending rose more than expected.

The yen also continues to suffer from weak interest rate differentials, with the BOJ’s current policy rate of 1.00%, well below the Fed’s federal funds rate target range of 3.50%-3.75%.

The yen has underlying support from increased expectations of a BOJ rate hike in either September or October.  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. The markets are discounting a 94% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

The Japan Aug consumer confidence index rose +0.6 to a 6-month high of 35.5, stronger than expectations of 35.3.

Japan Q2 capital spending unexpectedly rose +1.6% y/y, stronger than expectations of a -0.3% y/y decline.  Q2 capital spending ex-software rose +3.6% y/y, stronger than expectations of +1.6% y/y.

The Japan Aug S&P manufacturing PMI was revised downward by -0.2 to 54.9 from the previously reported 55.1.

December COMEX gold (GCZ26) closed down -85.10 (-1.90%) on Tuesday, and December COMEX silver (SIZ26) closed down -1.621 (-2.42%).

Precious metals sold off sharply on Tuesday for a third consecutive session, with gold falling to a 2-week low and silver falling to a 1.5-week low.  Tuesday’s stronger dollar undercut metal prices.  Also, Tuesday’s surge in global bond yields is bearish for precious metals.  In addition, Tuesday’s +5% rally in crude oil prices to a 6-week high boosted inflation expectations and could persuade the world’s central banks to raise interest rates, a negative factor for precious metals.  Finally, precious metals are being weighed down by negative carryover from last Friday when hawkish comments from Fed Chair Warsh boosted the chance of a Fed rate hike at next month’s FOMC meeting to 69% on Tuesday from 36% before he spoke. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday.  Long holdings in silver ETFs also rose to a 5-month high last Tuesday.

Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China’s PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first 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