Dollar Climbs with Crude Prices and T-Note Yields

The dollar index (DXY00) is up by +0.22% today.  The dollar is climbing today amid higher T-note yields, which are strengthening the dollar’s interest rate differentials.  Also, today’s more than +2% increase in WTI crude oil prices is raising inflation expectations and may persuade the Fed to tighten monetary policy, a supportive factor for the dollar. 

President Trump on Sunday signaled he's prepared to let economic pressure on Iran build rather than launch additional military strikes, saying the US was only "semi-negotiating" with Iran on the Strait of Hormuz and that the US blockade of Iran was deepening the country's financial woes.

The risk of a renewed flare-up across the Middle East remains high, which is providing safe-haven demand for the dollar. Another UAE tanker was targeted by an Iranian missile on Saturday while transiting the Strait of Hormuz.  Also, on Sunday, Houthi militants in Yemen claimed an attack on Saudi Arabia's Jazan refinery.

The markets are discounting a 47% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) is down by -0.09% today.  The dollar's strength today is weighing on the euro.   Also, the more than +2% increase in crude oil prices today is bearish for the Eurozone economy and the euro, as Europe imports most of its energy.  Losses in the euro are limited after the Eurozone Aug Sentix investor confidence index rose more than expected to a 6-month high. 

The Eurozone Aug Sentix investor confidence index rose +4.0 to a 6-month high of 0.9, stronger than expectations of -0.5. 

The markets are discounting an 87% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is up by +0.73% today.  The yen tumbled to a 1-week low against the dollar today. The yen is under pressure today from a +2% jump in crude oil prices, which is bearish for Japan’s economy and the yen as Japan imports more than 90% of its energy.  Also, higher T-note yields today are undercutting the yen. In addition, today’s +2% rally in the Nikkei Stock Index to a 2-week high curbed safe-haven demand for the yen.   

The Japan July eco watchers outlook survey rose +0.1 to a 5-month high of 45.8, although weaker than expectations of 46.1.

The summary of the July 30-31 BOJ meeting was hawkish and supportive of the yen as it showed one policymaker flagged the risk that rising inflation could possibly accelerate the pace of BOJ rate hikes.  Another board member called on the BOJ to demonstrate its determination to prevent upward inflation deviations, potentially with larger rate hikes.

The yen has near-term support amid signs the US would continue joint intervention in the forex market in support of the yen.  Kyodo reported today that BOJ Governor Kazuo Ueda's strong signal for a BOJ interest rate increase next month was the decisive factor behind the coordinated intervention in the yen by Japan and the US.  

The yen continues to suffer from weak interest rate differentials, with markets discounting a 63% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.  The BOJ’s current policy rate of 1.00% is well below the Fed’s federal funds rate target of 3.50%-3.75%.

October COMEX gold (GCV26) is down -13.10 (-0.30%) today, and September COMEX silver (SIU26) is up +0.681 (+1.07%).

Gold and silver prices are mixed.  Today’s stronger dollar is bearish for metals prices.  Also, higher global bond yields today are weighing on precious metals prices. In addition, today’s more than +2% increase in crude oil prices raises inflation expectations, which may persuade the world’s central banks to tighten their monetary policies, a bearish factor for precious metals. 

However, precious metals have carryover support from last Friday when the US July payroll report showed an unexpected decline in nonfarm payrolls and a smaller-than-expected increase in average hourly earnings, which could potentially persuade the Fed to ease monetary policy, a bullish factor for precious metals.  Gold prices also have support after China’s central bank, the PBOC, added gold to its reserves last month by +640,000 ounces, the largest increase in more than 2.5-years. 

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 10.25-month low on July 27, after reaching a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 1-year low on July 14 from the 3.5-year high posted on December 23.

Strong central bank demand for gold is supportive of gold prices, following last Friday’s 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.