Middle East Tensions Support the Dollar

The Eurozone Apr S&P manufacturing PMI unexpectedly rose by +0.6 to 52.2, stronger than expectations of a decline to 50.9 and the fastest pace of expansion in nearly four years. However, the Apr composite PMI fell -2.1 to 48.6, weaker than expectations of 50.1 and the steepest pace of contraction in 17 months.

Eurozone Mar new car registrations rose +12.5% y/y to 1.158 million units, the biggest increase in nearly two years.

Swaps are discounting a 10% chance of a +25 bp rate hike by the ECB at the April 30 policy meeting.

USD/JPY (^USDJPY) today is by +0.03%.  The yen slid to a 1.5-week low against the dollar today.  Today’s rising crude oil prices are bearish for the Japanese economy and the yen, as Japan imports more than 90% of its energy needs.  Today’s Japanese economic news was mixed for the yen, as manufacturing activity expanded more than expected but service-sector activity contracted.

Comments today from Japanese Finance Minister Satsuki Katayama hint that further yen weakness may prompt intervention in forex markets and are limiting losses in the yen, as she warned that Japanese government officials are in close contact with their US counterparts, with Japan remaining on high alert over speculative moves keeping the yen weak. 

The Japan Apr S&P manufacturing PMI rose +3.3 to 54.9, the strongest pace of expansion in 3.25 years. However, the Apr S&P services PMI fell -2.2 to an 11-month low of 51.2.

The markets are discounting a +5% chance of a 25 bp BOJ rate hike at the next meeting on April 28.

June COMEX gold (GCM26) today is down -13.10 (-0.28%), and May COMEX silver (SIK26) is down -2.101 (-2.69%).

Gold and silver prices are under pressure today, with silver falling to a 1.5-week low.  Today’s rally in the dollar index to a 1.5-week high is bearish for metals.  Also, today’s strength in crude oil prices is pushing inflation expectations higher, which may force the world’s central banks to tighten monetary policy, a bearish factor for precious metals.

Losses in precious metals are limited amid increased safe-haven demand amid concerns about the escalation of the US-Iran war, as the US and Iran are both blocking the Strait of Hormuz.  Peace talks are stalled as the US said it is waiting for Iran to submit a new peace proposal, though Iran said it has no plans to take part in negotiations as long as the US naval blockade of Iran remains in place.

Precious metals remain supported by uncertainty over US tariffs, US political turmoil, large US deficits, and government policy uncertainty, which are boosting demand for precious metals as a store of value.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.25-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 7.25-month low on March 27 after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following the recent news that bullion held in China’s PBOC reserves rose by +160,000 ounces to 74.38 million troy ounces in March, the seventeenth 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