The dollar index (DXY00) Wednesday rose by +0.43%. The dollar recovered from early losses Wednesday and moved moderately higher mid-morning following the release of the stronger-than-expected US Aug new home sales report. Higher bond yields on Wednesday also strengthened the dollar’s interest rate differentials. The dollar Wednesday initially moved lower due to the strength in the Chinese yuan, which rallied to a 16-month high on the heels of Chinese government actions this week to boost stimulus measures.
US Aug new home sales fell -4.7% m/m to 716,000, a smaller decline than expectations of a decline to 700,000.
The markets are discounting the chances at 100% for a -25 bp rate cut at the November 6-7 FOMC meeting and a 62% chance for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Wednesday retreated from a 14-month high and finished down by -0.43%. The euro retreated Wednesday after the dollar recovered from early losses and moved higher on the better-than-expected US Aug new home sales report.
The euro initially moved higher Wednesday on hawkish comments from ECB Governing Council member Knot, who said he doesn’t see interest rates returning to extremely low levels before the pandemic. Also, central bank divergence is lifting the euro, with the ECB seen cutting rates by only 25 bp more this year, whereas the Fed is expected to cut rates by 50 bp before year-end.
ECB Governing Council member Knot said, "I don't expect interest rates to return to the extremely low levels we saw before the pandemic," and he expects gradual interest-rate cuts "in the near future" and in the first half of next year.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 61% for the October 17 meeting and 100% for that -25 bp rate cut at the December 12 meeting.
USD/JPY (^USDJPY) Wednesday rose by +0.97%. The yen Wednesday fell to a 3-week low against the dollar. The yen is under pressure on negative carryover from Tuesday when BOJ Governor Ueda signaled that the BOJ is in no rush to raise interest rates. Also, higher T-note yields on Wednesday undercut the yen. Wednesday’s stronger-than-expected Japan Aug PPI services prices report was hawkish for BOJ policy and supportive of the yen.
Japan Aug PPI services prices rose +2.7% y/y, unchanged from July and slightly stronger than expectations of +2.6% y/y.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 4% for the October 30-31 meeting and a +12% chance for that +10 bp rate hike at the December 18-19 meeting.
December gold (GCZ24) Wednesday closed up +7.70 (+0.29%), and December silver (SIZ24) closed down -0.412 (-1.27%). Precious metals Wednesday settled mixed, with Dec gold posting a new contract high and nearest-futures (U24) gold posting a new record high of $2,659.20 an ounce. Gold prices are climbing as recent weak US economic data bolsters the case for additional Fed interest rate cuts, boosting demand for gold as a store of value. In addition, fund buying of gold has supported gold prices as long gold positions in ETFs rose to a 7-1/2 month high Tuesday.
Wednesday’s rally in the dollar was bearish for metals. Also, higher global bond yields on Wednesday were negative for precious metals. Silver prices also retreated Wednesday due to concerns that Chinese industrial metals demand will continue to remain weak despite the government’s action to boost stimulus measures.
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.
