Dollar Supported by Higher T-Note Yields

The dollar index (DXY00) is up by +0.19% today.  The dollar is climbing today amid higher T-note yields, which strengthened the dollar’s interest rate differentials.  Dollar gains are limited after the University of Michigan US Oct consumer sentiment index fell more than expected to a 5-month low. Also, a stronger Chinese yuan weighed on the dollar after it climbed to a 4-year high against the dollar today.

The University of Michigan US Oct consumer sentiment index fell -1.8 to a 5-month low of 46.3, weaker than expectations of 47.6.

The University of Michigan US Oct 1-year inflation expectations rose to a 5-month high of 4.7% from 4.6% in Sep, and the 5-10 year inflation expectations rose to a 5-month high of 3.5% from 3.4% in Sep.

Markets are pricing in a 19% chance of a +25 bp Fed rate hike at the next FOMC meeting on October 27-28. 

EUR/USD (^EURUSD) is down by -0.13% today.  Dollar strength today is weighing on the euro.  Also, the larger-than-expected decline in Italy’s Aug industrial production is bearish for the euro.  Weakness in crude oil prices today is limiting euro losses, as lower crude supports the Eurozone economy and the euro, since Europe imports most of its energy. 

Italy's Aug industrial production fell -1.3% m/m, weaker than expectations of no change and the biggest decline in a year.

The markets are discounting an 11% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) is up by +0.29% today.  The yen is under pressure today from a stronger dollar and higher T-note yields.  The Japan 10-year JGB yield also fell to a 3-week low of 3.009%, narrowing the yen’s interest-rate differentials.   

Losses in the yen are contained by today’s better-than-expected Japanese economic news on Sep machine tool orders and Aug household spending.  Also, today’s nearly -1% decline in crude oil prices supports the Japanese economy and the yen, as Japan imports more than 90% of its energy.

Markets are pricing in a 9% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) is up +58.50 (+1.41%) today, and December COMEX silver (SIZ26) is up +1.791 (+3.01%).

Precious metals prices are moving sharply higher today amid weakness in crude oil prices.  WTI crude oil is down nearly -1% today after President Trump said he’d refrain from attacking Iran before the US midterm elections. Lower crude prices ease inflation expectations and could persuade the world’s central banks to ease monetary policy, which is bullish for precious metals. 

On the negative side for precious metals today are a stronger dollar and higher T-note yields. Also, stronger stocks today have reduced safe-haven demand for 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 Thursday.  Long holdings in silver ETFs rose to a 6.25-month high last Tuesday.

Strong central bank demand for gold is supporting gold prices, after Thursday’s news showed that bullion held in China's PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third 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.