Dollar Slips on Japanese Yen Strength

The dollar index (DXY00) fell to a 2-week low on Tuesday and finished down by -0.38%. The dollar retreated on Tuesday amid strength in the yen, which rallied to a 6.5-month high against the dollar. The dollar recovered from its worst level today after crude oil prices jumped more than +1% to a 3-month high, boosting inflation expectations and potentially persuading the Fed to tighten monetary policy, which supports the dollar.

The markets are discounting a 62% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

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EUR/USD (^EURUSD) rose by +0.03% on Tuesday. The euro rose slightly on Tuesday amid weakness in the dollar. However, gains in the euro were limited by weaker-than-expected German trade news for July. Also, Tuesday’s rally in crude oil prices to a 3-month high is negative for the Eurozone economy and the euro, as Europe imports most of its energy.

German trade news was weaker than expected. German July exports unexpectedly fell -0.8% m/m, weaker than expectations of a +0.3% m/m gain. Also, July imports fell -5.7% m/m, weaker than expectations of -1.0% m/m and the biggest decline in 6.25 years.

The markets are discounting a 100% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) fell by -0.31% on Tuesday. The yen rallied to a 6.5-month high against the dollar on Tuesday amid some positive Japanese economic news. Q2 Japan GDP was revised upward, and the Japan Aug Eco Watchers outlook survey rose more than expected. Also, speculation that the Japanese Government Pension Investment Fund, which holds $2.1 trillion in assets, may shift its allocation to more Japanese government bonds supported the yen.

The yen fell back from its best level on Tuesday after crude oil prices jumped to a 3-month high, which is negative for the Japanese economy and yen, as Japan imports more than 90% of its energy. Also, Tuesday’s decline in Japan’s JGB 10-year bond yield to a 1.5-week low of 2.876% weakened the yen’s interest rate differentials.

Japan Q2 GDP was revised upward to +1.4% (q/q annualized) from the previously reported +1.1%, below expectations of +1.8%.

The Japan Aug Eco Watchers outlook survey rose +2.5 to 48.3, stronger than expectations of 46.4.

The yen found support today after 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 move to boost its allocation of Japanese government bonds, which would support the yen.

The yen also has underlying support from increased expectations of a BOJ rate hike later this month. The markets are discounting a 100% chance of a +25 bp BOJ rate hike at the September 18 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 -37.60 (-0.84%) on Tuesday, and December COMEX silver (SIZ26) closed up +0.252 (+0.38%).

Precious metals settled mixed on Tuesday. Gold prices retreated on Tuesday after WTI crude oil rose more than +1% to a 3-month high, boosting inflation expectations and potentially persuading the world’s central banks to tighten monetary policy, a bearish factor for precious metals. Precious metals losses were limited on Tuesday by the dollar index’s slide to a 2-week low. Also, Tuesday’s rally in copper prices to a record high provides some carryover support to silver prices.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 5.75-month high last Thursday. Long holdings in silver ETFs also rose to a 5.5-month high on August 25.

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

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Dollar Slips on Japanese Yen Strength

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