Dollar Pressured by Lower T-Note Yields

The dollar index (DXY00) fell to a 1-week low on Thursday and finished down by -0.49%.  The dollar slid on Thursday on weaker T-note yields after the 10-year T-note yield fell to a 3-week low of 5.035%, narrowing the dollar’s interest-rate differentials. Also, dovish comments from San Francisco Fed President Mary Daly weighed on the dollar when she signaled she would hold interest rates steady at the October 27-28 FOMC meeting.

The dollar recovered from its worst level Thursday on stronger-than-expected US economic news. Sep PPI final demand and Sep retail sales rose more than expected, and the Oct Empire manufacturing survey of general business conditions rose more than expected to a 4.75-year high.

US weekly initial unemployment claims rose by +1,000 to 199,000, close to expectations of 200,000.

US Sep PPI final demand rose +6.3% y/y, stronger than expectations of +5.4% y/y and the most in 3.75 years.  Sep PPI ex-food and energy rose +5.0% y/y, stronger than expectations of +4.4% y/y and the most in more than 3.5 years.

US Sep retail sales rose +0.8% m/m, stronger than expectations of +0.3% m/m, and Sep retail sales ex-autos rose+0.9% m/m, stronger than expectations of +0.5% m/m.

The US Oct Philadelphia Fed business outlook survey fell by -16.9 to 20.9, weaker than expectations of 28.0.

The US Oct Empire manufacturing survey of general business conditions rose +17.9 to a 4.75-year high of 25.5, stronger than expectations of 12.0.

Comments from San Francisco Fed President Mary Daly signal she would hold interest rates steady at the October 27-28 FOMC meeting, when she said she thinks interest rate hikes are likely needed, although not immediately. 

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

EUR/USD (^EURUSD) rose by +0.47% on Thursday.  Dollar weakness on Thursday supported the euro.  Also, Thursday’s -1% decline in European nat-gas prices is supportive for the Eurozone economy and the euro, as Europe imports most of its energy.

The euro fell from its best level Thursday after Eurozone Aug industrial production posted its biggest decline in 7 months.  Also, dovish comments from ECB Governing Council member Martins Kazaks undercut the euro on Thursday when he said the ECB can afford to take its time adjusting interest rates.

Eurozone Aug industrial production fell -0.5% m/m, weaker than expectations of no change and the biggest decline in 7 months.

ECB Governing Council member Martins Kazaks said the ECB can afford to take its time adjusting interest rates, despite persistent energy price rises that will keep consumer price growth elevated, as the recent surge in government bond yields may start to weigh on economic activity.

The markets are discounting a 9% chance of a +25 bp ECB rate hike at the ECB’s next policy meeting on October 29.

USD/JPY (^USDJPY) fell by -0.11% on Thursday.  The yen moved higher Thursday as the Nikkei Stock Index slumped to a 4-week low, spurring safe-haven buying of the yen.  Also, hawkish comments on Thursday from BOJ Board member Junko Koeda boosted the yen when he warned against too much caution over raising interest rates.  Sharply lower T-note yields on Thursday also supported the yen.

Yen gains were limited on Thursday after Japan revised down its August industrial production.  The yen also faced pressure after the 10-year Japan JGB yield fell to a 5-week low of 2.898%, weakening the yen’s interest rate differential.

Japan Aug core machine orders rose +5.2% m/m, stronger than expectations of +2.3% m/m

Japan Aug industrial production was revised downward by -0.7 to -2.4% m/m from the previously reported -1.7% m/m.

BOJ Board member Junko Koeda said that "given that there have been considerable upside risks to prices in addition to continued accommodative financial conditions, the BOJ should not become overly cautious about raising the policy interest rate."

Markets are pricing in a 5% chance of a +25 bp BOJ rate hike at the next policy meeting on October 30.

December COMEX gold (GCZ26) closed up +62.20 (+1.51%) on Thursday, and December COMEX silver (SIZ26) closed up +1.279 (+2.29%).

Precious metals prices settled sharply higher on Thursday.   Dollar weakness on Thursday boosted metals prices. Also, Thursday’s decline in global bond yields supported precious metals.  In addition, dovish central bank comments on Thursday were bullish for precious metals after San Francisco Fed President Mary Daly signaled she would hold interest rates steady at the October 27-28 FOMC meeting, and after ECB Governing Council member Martins Kazaks said the ECB can afford to take its time in adjusting interest rates.

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4-year high last Thursday.  Long holdings in silver ETFs rose to a 6.5-month high on September 22.

Strong central bank demand for gold is supporting gold prices, after last 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.