Dollar Edges Higher as Stocks Fall and Crude Oil Rallies

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 97% 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) closed down -57.00 (-1.29%) on Monday, and December COMEX silver (SIZ26) closed down -1.050 (-1.61%).

Precious metals prices fell sharply on Monday and posted 5-week lows. Monday’s rally in the dollar index to a 1.5-week high weighed on metals prices. Also, Monday’s rally in crude oil prices to a 3.75-month high raised inflation expectations and could persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals. In addition, hawkish comments from ECB Executive Board member Isabel Schnabel and ECB Governing Council member Peter Kazimir on Monday weighed on precious metals as they warned of additional ECB rate hikes if inflation deteriorates. Finally, expectations that the Fed will raise interest rates by 25 bp at the Tue/Wed FOMC meeting are weighing on precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 6.25-month high last Friday. 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