Dollar Falls as Stocks Rally on Iran Deal Optimism

The dollar index (DXY00) on Friday fell to a 2-week low and finished down by -0.14%.  The improving prospects for a US-Iran peace deal sparked a rally in stocks, reducing liquidity demand for the dollar.  Also, Friday’s -1% fall in WTI crude oil to a 5-week low lowers inflation expectations and could prompt the Fed to ease monetary policy, a bearish factor for the dollar.  Losses in the dollar were limited on Friday after the May MNI Chicago PMI rose more than expected at its strongest pace in 4.25 years.  Fed comments on Friday were mixed for the dollar.

The US May MNI Chicago PMI rose +13.5 to 62.7, stronger than expectations of 50.3 and the strongest pace of expansion in 4.25 years.

San Francisco Fed President Mary Daly said Fed interest rate policy is in a good place and that she’s “cautiously optimistic” about the US economy, noting that “there’s no urgency to make an adjustment” to interest rates.

Kansas City Fed President Jeff Schmid said, “With inflation running above the Fed’s 2% definition of price stability or over five years, now is not the time to let down our guard, and we must continue to signal our commitment to price stability and our willingness to take the actions necessary to achieve our mandate.”

Minneapolis Fed President Neel Kashkari said, “I think it’s premature for me to conclude we need to be raising rates right away and that we need to keep watching the data and watching how the conflict in the Middle East unfolds before I want to make any adjustments.”

Swaps markets are discounting the odds at 2% for a 25 bp rate cut at the next FOMC meeting on June 16-17.

EUR/USD (^EURUSD) climbed to a 2-week high on Friday and finished up by +0.15%.  The euro moved higher on Friday amid dollar weakness.  Also, signs of strength in the German labor market are bullish for the euro, following unexpectedly lower German May unemployment and a decline in the May unemployment rate.  In addition, hawkish ECB comments on Friday were positive for the euro after ECB Governing Council members Panetta and Simkus said they supported an ECB rate hike at next month’s policy meeting.  Gains in the euro were limited after German May consumer prices rose less than expected, a dovish factor for ECB policy. 

The German May unemployment change unexpectedly fell by -12,000, showing a stronger labor market than expectations of a +10,000 increase.  The May unemployment rate unexpectedly fell -0.1 to 6.3%, showing a stronger labor market than expectations of no change at 6.4%.

German May CPI (EU harmonized) fell -0.1% m/m and rose +2.7% y/y, weaker than expectations of unchanged m/m and +2.8% y/y.

ECB Governing Council member Fabio Panetta signaled his support for an ECB rate hike, saying, “The forward-looking picture system seems to call for a recalibration of the monetary policy stance to counter the risk of persistent inflationary tensions.”

ECB Governing Council member Gediminas Simkus said he’s likely to support an ECB rate hike in June and “a second rate hike is more likely than not.”

Swaps are discounting an 89% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.

USD/JPY (^USDJPY) finished unchanged on Friday.  The yen found support on Friday amid signs of strength in the Japanese economy.  Japan’s Apr industrial production, Apr retail sales, and May consumer confidence index rose more than expected.  Also, Japan’s Apr jobless rate unexpectedly fell to a 9-month low.  Also, Friday’s decline in crude oil prices to a 5-week low is positive for the Japanese economy and the yen, as Japan imports more than 90% of its energy.

Negative factors for the yen included Friday’s rally in the Nikkei Stock Index to a new all-time high, which reduced safe-haven demand for the yen.  Also, Friday’s weaker-than-expected Japan May Tokyo CPI report is dovish for BOJ policy and bearish for the yen.

The Japan May consumer confidence index rose +1.4 to 33.6, stronger than expectations of 32.4.

Japan Apr industrial production unexpectedly rose +0.8% m/m, stronger than expectations of a decline of -0.6% m/m.

Japan Apr retail sales rose +1.3% m/m, stronger than expectations of +0.4% m/m.

The Japan Apr jobless rate unexpectedly fell -0.2 to a 9-month low of 2.5%, showing a stronger labor market than expectations of no change of 2.7%. 

The Japan May Tokyo CPI rose +1.4% y/y, weaker than expectations of +1.6% y/y.  May Tokyo CPI ex-fresh food and energy rose +1.6% y/y, weaker than expectations of +1.8% y/y and the slowest pace of increase in 20 months.

The markets are discounting a +79% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.

June COMEX gold (GCM26) on Friday closed up +61.20 (+1.36%), and July COMEX silver (SIN26) closed down -0.037 (-0.05%).

Gold and silver prices settled mixed on Friday.  Dollar weakness on Friday was supportive for metals prices.  Precious metals also have support on the improved prospects for a US-Iran peace agreement, which knocked WTI crude oil prices down to a 5-week low on Friday, reducing inflation expectations that could prompt the world’s central banks to ease their monetary policies, a bullish factor for precious metals. Also, lower global bond yields on Friday were supportive of precious metals prices. 

Strength in stocks on Friday reduces safe-haven demand for precious metals.  Also, hawkish central bank comments on Friday were negative for precious metals after Kansas City Fed President Jeff Schmid and ECB Governing Council members Panetta and Simkus expressed their support for tighter monetary policy to address inflation pressures. 

Silver prices also came under pressure on Friday after HSBC said silver is “fundamentally overvalued” and could diverge from gold’s trajectory.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.5-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 9.5-month low on May 5 after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following 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.