Dollar Weakens on Strength in the Chinese Yuan
The dollar index (DXY00) is down by -0.16% today. The dollar is modestly lower today, consolidating below last Friday's 2-week high. Today's rally in the Chinese yuan to a 3.5-year high is undercutting the dollar.
However, losses in the dollar are limited today as WTI crude oil climbs more than +2% to a 1-week high, which raises inflation expectations and could potentially persuade the Fed to raise interest rates, a supportive factor for the dollar. Also, weaker stocks today have boosted some liquidity demand for the dollar, and higher T-note yields have strengthened the dollar's interest rate differentials. Finally, the dollar has some carryover support from last Friday, when Fed Chair Warsh warned inflation isn't meaningfully slowing and vowed that policymakers will return inflation to their 2% target. The chance of a Fed rate hike at next month's FOMC meeting rose to 63% today from 36% before Warsh's speech.
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Chinese economic news was mixed after China's Aug manufacturing PMI rose +0.6 to 49.8, stronger than expectations of 49.5. However, the Aug non-manufacturing PMI was unchanged at 49.0, weaker than expectations of an increase to 49.4.
The markets are discounting a 63% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.
EUR/USD (^EURUSD) is up by +0.14% today. The euro is moving higher today amid weakness in the dollar. However, gains in the euro are limited after German Aug consumer prices rose less than expected, a dovish factor for ECB policy. Also, today's +3% jump in crude oil prices raises inflation expectations and could prompt the ECB to tighten monetary policy, a supportive factor for the euro. In addition, today's increase in the 10-year German Bund yield to a 15-year high of 3.317% strengthens the euro's interest rate differentials.
German Aug CPI (EU harmonized) rose +0.2% m/m and +2.9% y/y, weaker than expectations of +0.3% m/m and +3.1% y/y.
The markets are discounting a 96% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
USD/JPY (^USDJPY) is down by -0.18% today. The yen is moving higher today on signs of strength in Japan's economy after July industrial production unexpectedly rose, and July retail sales posted their largest increase in 6 months.
Gains in the yen are limited, with today's +2% jump in crude oil prices to a 1-week high, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. Today's higher T-note yields are also bearish for the yen.
The yen also continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00%, well below the Fed's federal funds rate target range of 3.50%-3.75%.
The yen has underlying support from increased expectations of a BOJ rate hike in either September or October. The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen. Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting an 84% chance of a +25 bp BOJ rate hike at the September 18 policy meeting.
Japan July industrial production unexpectedly rose +0.1% m/m, stronger than expectations of -0.7% m/m.
Japan July retail sales rose +2.4% m/m, stronger than expectations of +1.6% m/m and the biggest increase in 6 months.
October COMEX gold (GCV26) is down -48.80 (-1.09%) today, and September COMEX silver (SIU26) is down -0.655 (-0.98%).
Precious metals extended last Friday's sharp losses today, with gold falling to a 1.5-week low and silver dropping to a 1-week low. Higher global bond yields today are bearish for precious metals. Also, today's +2% jump in crude oil prices to a 1-week high boosts inflation expectations and could persuade the world's central banks to raise interest rates, a negative factor for precious metals. Finally, precious metals are being weighed down by negative carryover from last Friday when hawkish comments from Fed Chair Warsh boosted the chance of a Fed rate hike at next month's FOMC meeting to 63% from 36% before he spoke.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday. Long holdings in silver ETFs also rose to a 5-month high last Tuesday.
Strong central bank demand for gold is supportive of gold prices, following the Aug 7 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.
