Dollar Rebounds as T-note Yields Rise

The dollar index (DXY00) rose by +0.09% on Wednesday.  The dollar shook off early losses on Wednesday and moved higher after T-note yields rose.  Signs of strength in the US economy also supported the dollar after Q2 GDP was revised higher, and the Sep ADP employment change and Sep MNI Chicago PMI rose more than expected. In addition, Aug personal spending rose the most in 5 months.  Finally, Wednesday’s +1% increase in WTI crude oil raises inflation expectations that could prompt the Fed to tighten monetary policy, a supportive factor for the dollar. 

The dollar initially moved lower on Wednesday as US economic news showed weaker-than-expected inflation readings on Aug core PCE price index and the Q2 core PCE price index and lessened the chance of a Fed rate hike next month.  Fed rate hike chances for the October FOMC meeting dropped to 37% on Wednesday from 52% on Tuesday.

The US Sep ADP employment change rose by +90,000, stronger than expectations of +75,000.

US Aug personal spending rose +0.9% m/m, right on expectations and the largest increase in five months.  Aug personal income rose +0.2% m/m, weaker than expectations of +0.5% m/m.

The US Aug core PCE price index, the Fed's preferred inflation gauge, rose +0.2% m/m and +3.0% y/y, weaker than expectations of +0.3% m/m and +3.3% y/y. 

US Q2 GDP was revised upward to +2.2% (q/q annualized), stronger than expectations of no change at +1.5%, as Q2 personal consumption was revised upward to +3.8% from the previously reported +3.4%.  The Q2 core PCE price index was revised downward to +3.3% from the previously reported +3.6%.

The US Sep MNI Chicago PMI rose +11.7 to 58.8, stronger than expectations of 51.0 and the fastest pace of expansion in four months.

Markets are pricing in a 37% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) fell by -0.11% on Wednesday.  The euro gave up an early advance and turned lower on Wednesday after the dollar recovered from early losses and moved higher, fueling long liquidation in the euro. 

The euro initially moved higher on Wednesday, as signs of faster inflation in Germany are hawkish for ECB policy and supportive of the euro after German Sep CPI rose more than expected.  Also, Wednesday’s +1% increase in crude oil prices raises inflation risks that could persuade the ECB to keep tightening monetary policy, a bullish factor for the euro. 

The German Sep unemployment change rose +12,000, showing a weaker labor market than expectations of 500.

German Aug retail sales rose +1.3% m/m, the largest increase in 14 months but slightly weaker than expectations of +1.5% m/m.

German Sep CPI (EU harmonized) rose +0.6% m/m and +3.3% y/y, stronger than expectations of +0.5% m/m and +3.2% y/y, with the +3.3% y/y gain the largest year-on-year increase in 2.75 years.

The markets are discounting a 26% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) rose by +0.04% on Wednesday.  The yen fell from a 1.5-week high against the dollar on Wednesday and moved lower on strength in T-note yields after the 10-year T-note yield climbed to a new 19-year high of 5.30%.  Wednesday’s +1% gain in crude oil prices also weighed on the yen.  In addition, Wednesday’s weaker-than-expected Japanese economic news on Aug industrial production and Aug retail sales undercut the yen. 

The yen initially moved higher on Wednesday after weaker-than-expected US inflation news reduced the chance of a Fed rate hike next month.  The yen also has carryover support from Monday, when Reuters reported that Japan's top currency official, Atsushi Mimura, said that Japan's prime minister and finance minister, along with the US, have recently sent a "very clear" message about the yen's depreciation. His comments have bolstered speculation that Japanese authorities may be preparing another joint intervention with the US to support the yen.

Japan's Aug industrial production fell -1.7% m/m, weaker than expectations of -1.3% m/m and the biggest decline in six months.

Japan Aug retail sales fell -1.2% m/m, weaker than expectations of -1.1% m/m.

Markets are pricing in a 21% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +7.00 (+0.17%) on Wednesday, and December COMEX silver (SIZ26) closed down -0.587 (-0.96%).

Precious metals settled mixed on Wednesday, with silver falling to a1.75-month low.  Favorable US inflation news on Wednesday reduced the chance of a Fed rate hike next month, supporting precious metals.  Silver prices also garnered support today after US Q2 GDP was revised higher, a supportive factor for industrial metals demand. 

However, gold fell from its high, and silver slid into negative territory on Wednesday as the dollar index recovered from early losses and moved higher.  Also, Wednesday’s +1% increase in crude oil prices raised inflation expectations and could prompt the world’s central banks to tighten their monetary policies, a bearish factor for precious metals.  In addition, Wednesday’s news showing stronger-than-expected German Sep CPI is hawkish for ECB policy and negative for precious metals. Finally, higher T-note yields on Wednesday weighed on precious metals.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high on Tuesday.  Long holdings in silver ETFs rose to a 6-month high on Wednesday.

Strong central bank demand for gold is supporting gold prices, after news last Monday that bullion held in China's PBOC reserves rose by +650,000 ounces to 76.73 million troy ounces in August, the largest increase in three years and the twenty-second consecutive month the PBOC 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.