The dollar index (DXY00) Tuesday rose by +0.08% on stronger-than-expected US retail sales and import price reports. The dollar also has support from the improved chances that Donald Trump will win the presidential election in November, as Trump’s tax-cut and trade policies are seen as inflationary and hawkish for Fed policy. The dollar fell back from its best levels after the July NAHB housing market index unexpectedly fell to a 7-month low and after Fed Governor Kugler said it would be appropriate for the Fed to lower borrowing costs "later this year" if inflation continues to moderate.
US June retail sales were unchanged m/m, stronger than expectations of a -0.3% m/m decline. Also, June retail sales ex-autos rose +0.4% m/m, stronger than expectations of +0.1% m/m.
The US June import price index ex-petroleum unexpectedly rose +0.2% m/m versus expectations of a -0.2% m/m decline.
The US July NAHB housing market index unexpectedly fell -1 to a 7-month low of 42, weaker than expectations of no change at 43.
Fed Governor Kugler said it would be appropriate for the Fed to lower borrowing costs "later this year" if inflation continues to moderate alongside a cooling labor market.
The markets are discounting the chances for a -25 bp rate cut at 7% for the July 30-31 FOMC meeting and 100% for the following meeting on Sep 17-18.
EUR/USD (^EURUSD) Tuesday finished little changed, up by +0.03%. The euro garnered some support Tuesday after the German July ZEW survey expectations of economic growth fell less than expected. A stronger dollar Tuesday limited gains in the euro.
The German July ZEW survey expectations of economic growth fell -5.7 to a 4-month low of 41.8 but was stronger than expectations of 41.0.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 4% for the July 18 meeting and 80% for the September 12 meeting.
USD/JPY (^USDJPY) Tuesday rose by +0.23%. The yen was under pressure Tuesday from a stronger dollar. Also, an unexpected decline in the Japan May tertiary industry activity index was negative for the yen. In addition, government bond yield divergence is bearish for the yen, with Japanese government bond yields well below those of other G-7 nations. The yen recovered from its worst level after the 10-year T-note yield fell to a 4-month low.
The Japan May tertiary industry activity index unexpectedly fell -0.4% m/m, weaker than expectations of +0.1% m/m.
A Bloomberg analysis of the Bank of Japan's (BOJ) current account indicates the BOJ spent around 2.14 trillion yen ($13.5 billion) intervening in the forex market to support the yen last Friday.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 43% for the July 31 meeting and 35% for the September 20 meeting.
August gold (GCQ24) Tuesday closed up +38.90 (+1.60%), and September silver (SIU24) closed up +0.522 (+1.69%). Precious metals prices Tuesday settled moderately higher, with Aug gold posting a 1-3/4 month high and nearest-futures (N24) posting a record high. Gold is climbing on increased demand as an inflation hedge after the chances of former President Trump winning the election in November increased, which could boost inflation if he pursues new tax cuts and stimulative fiscal policies. Gold also has support from fund buying after long gold holdings in ETFs rose to a 3-month high Monday. Gold prices raced to their highs Tuesday on dovish comments from Fed Governor Kugler, who said it would be appropriate for the Fed to lower borrowing costs "later this year" if inflation continues to moderate.
A stronger dollar on Tuesday was bearish for metals. Also, strength in stocks on Tuesday curbed some safe-haven demand for precious metals. A bearish factor for silver prices was some negative carryover from Tuesday’s slide in copper prices to a 1-1/2 week low.
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.
