Dollar Rallies on Euro and Yen Weakness

The dollar index (DXY00) today is up by +0.44% at a 1-week high.  The dollar is climbing today after French Prime Minister Lecornu resigned, which undercut the euro.  Also, the yen tumbled after Sanae Takaichi, a proponent of easy fiscal and monetary policy, won Saturday’s election to become Japan’s new prime minister.  Higher T-note yields today have also strengthened the dollar’s interest rate differentials.

The ongoing shutdown of the US government is bearish for the dollar as the shutdown entered its second week today.  The longer the shutdown is maintained, the more likely the US economy will suffer, and GDP growth will stagnate, a negative factor for the dollar.

The markets are pricing in a 95% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.

EUR/USD (^EURUSD) today is down by -0.37% and fell to a 1-week low.  Political turmoil in France is weighing on the euro after French Prime Minister Lecornu resigned following President Macron’s naming of a new cabinet, raising uncertainty about the Eurozone’s second-largest economy.  The euro recovered from its worst level after the Eurozone Oct Sentix investor confidence index rose more than expected.

Eurozone Aug retail sales rose +0.1% m/m, right on expectations.

The Eurozone Oct Sentix investor confidence index rose +3.8 to -5.4, stronger than expectations of -7.7.

Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.

USD/JPY (^USDJPY) today is up sharply by +1.72%.  The yen tumbled to a 2-month low against the dollar today after Sanae Takaichi, a pro-stimulus lawmaker, was elevated to leader of Japan’s ruling Liberal Democratic Party in Saturday’s election, which makes her the likely new Japanese prime minister. Takaichi’s surprise victory undermines the yen, as her victory has curbed expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about increased debt supply due to fiscal stimulus.  Also, higher T-note yields today weighed on the yen.

December gold (GCZ25) today is up +64.60 (+1.65%), and December silver (SIZ25) is up +0.585 (+1.22%).  Precious metal prices are moving higher today, with Dec gold posting a new contract high and nearest-futures (V25) gold posting an all-time high of $3,944.00 a troy ounce.  Also, Dec silver posted a contract high, and nearest-futures (V25) silver posted a 14-year high.

Precious metals are soaring today as the shutdown of the US government enters a second week, boosting safe-haven demand for precious metals.  Also, political turmoil in France is boosting safe-haven demand for precious metals after French Prime Minister Lecornu resigned when President Macron named a new cabinet.  In addition, demand for precious metals as a store of value is supporting prices after Sanae Takaichi, a proponent of easy fiscal and monetary policy, won Saturday’s election to become Japan’s leader of the ruling LDP party and is likely to become the new Japanese prime minister. Takaichi’s surprise victory has curbed expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about increased debt supply due to expanded financial stimulus.

Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs, geopolitical risks, and global trade tensions.  Also, President Trump’s attacks on Fed independence are boosting demand for gold, as he attempts to fire Fed Governor Cook.  Additionally, Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors contributes to this uncertainty.

Recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals.  The swaps market shows a 95% chance the Fed will cut the federal funds target range by 25 bp at the October 28-29 FOMC meeting.

Precious metals prices continue to receive support from fund buying of precious metal ETFs.  Gold holdings in ETFs rose to a 3-year high last Friday, and silver holdings in ETFs rose to a 3-year high last Wednesday.

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. This article was originally published on Barchart.com