The dollar index (DXY00) rallied to a 1.5-week high on Wednesday, finishing up by 0.22%. The dollar moved higher on Wednesday on the stronger-than-expected US Apr PPI report, which was hawkish for Fed policy. The dollar also has safe-haven support on concerns that the US-Iran ceasefire may break down after President Trump said the current ceasefire was on “life support.” In addition, Wednesday’s jump in the 10-year T-note yield to a 10-month high of 4.49% strengthens the dollar’s interest rate differentials.
US Apr PPI final demand rose +1.4% m/m and +6.0% y/y, stronger than expectations of +0.5% m/m and +4.8% y/y, with the +6.0% y/y jump being the largest increase in 3.25 years. Also, Apr PPI ex-food and energy rose +0.6% m/m and +5.2% y/y, stronger than expectations of +0.3% m/m and +4.3% y/y, with the +5.2% y/y gain being the largest increase in 3.25 years.
Swaps markets are discounting the odds at 3% for a 25 bp rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Wednesday fell by -0.26%. Wednesday’s stronger dollar weighed on the euro. The euro was also under pressure from Wednesday’s Eurozone economic reports, which were dovish for ECB policy.
Eurozone Mar industrial production rose +0.2% m/m, slightly weaker than expectations of +0.3% m/m.
The French Q1 mainland unemployment rate rose +0.2 points to a 5-year high of 7.9%, showing a weaker labor market than expectations of 7.8%.
ECB Governing Council member Olli Rehn warned that recent data are starting to point to stagflation as a result of the Iran war and rising energy prices, saying, “The first signs were already visible in the statistics, when growth in the Eurozone in the first quarter was only slightly positive, and inflation accelerated to 3%.”
Swaps are discounting an 84% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.
USD/JPY (^USDJPY) on Wednesday rose by +0.16%. The yen was under pressure on Wednesday from a stronger dollar. Also, the April Eco Watchers Outlook Survey rose less than expected, a negative factor for the yen. Higher Japanese government bond yields are supportive for the yen after the 10-year JGB bond yield rose to a 29-year high of 2.60% on Wednesday.
The Japan Apr Eco Watchers Outlook survey rose +0.7 to 39.4, weaker than the 40.9 expected.
The markets are discounting a +64% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.
June COMEX gold (GCM26) on Wednesday closed up +20.00 (+0.43%), and July COMEX silver (SIN26) closed up +3.777 (+4.41%).
Gold and silver prices settled higher on Wednesday, with silver up sharply at a 2-month high. Precious metals have safe-haven support after the US and Iran failed to come to an agreement to end the war, which could lead to renewed hostilities in the Middle East. Also, Wednesday’s -1% decline in crude oil prices lowers inflation expectations and may prompt the world’s central banks to ease their monetary policies, a supportive factor for precious metals.
Wednesday’s rally in the dollar index to a 1.5-week high limited gains in gold prices. Also, Wednesday’s stronger-than-expected US Apr PPI report may prompt the Fed to tighten monetary policy, a bearish factor for precious metals. In addition, higher global bond yields on Wednesday were bearish for precious metals.
Silver prices also had carryover support on Wednesday from a rally in copper to a new record high. Copper prices are soaring as a squeeze on Middle Eastern sulfur supplies, driven by the closure of the Strait of Hormuz, threatens the production outlook for some global copper mines, as sulfur is used in processing about a sixth of global copper.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5-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 9-month low last Tuesday after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following last Thursday’s news that bullion held in China’s PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth 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. For more information please view the Barchart Disclosure Policy here.
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