Dollar Pushes Higher as Crude Oil Surges and T-Note Yields Rise

The dollar index (DXY00) rose by +0.29% on Monday.  The dollar pushed higher on Monday amid higher T-note yields, which strengthened the dollar’s interest rate differentials.  Also, Monday’s +5% surge in WTI crude oil prices raised inflation expectations and may persuade the Fed to tighten monetary policy, a supportive factor for the dollar. 

Hawkish comments on Monday from Cleveland Fed President Beth Hammack were dollar-supportive when she said she is not seeing a problem with the job market and that inflation is not coming down on its own. She added that "now is the time" for us to take action, as the current interest rate is not meaningfully restricting the economy and we would probably need  "some number" of rate hikes to bring down inflation.

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 52% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) fell by -0.15% on Monday.  The dollar's strength on Monday weighed on the euro.   Also, the +5% increase in crude oil prices on Monday was bearish for the Eurozone economy and the euro, as Europe imports most of its energy.  Losses in the euro were 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 a 90% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) rose more than +0.94% on Monday.  The yen tumbled to a 1-week low against the dollar on Monday.  The yen is under pressure on Monday from the +5% surge 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 on Monday undercut the yen.  In addition, Monday’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 on Monday that BOJ Governor Kazuo Ueda's strong signal for a BOJ interest rate increase next month was the decisive factor behind the recent 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) closed up +20.00 (+0.46%) on Monday, and September COMEX silver (SIU26) closed up +1.773 (+2.79%).

Gold and silver prices settled higher on Monday, with silver rallying sharply to a 7-week high.  Precious metals rose on 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. 

Monday’s stronger dollar was bearish for metals prices.  Also, higher global bond yields on Monday were negative for precious metals.  In addition, Monday’s +5% surge 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.  Gains in gold were limited due to hawkish comments from Cleveland Fed President Hammack, who said the Fed would probably need  "some number" of rate hikes to bring inflation down. 
 

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.