Dollar Firms on Higher T-Note Yields and Euro Weakness

The dollar index (DXY00) today is up by +0.25% on strength in T-note yields. Gains in the dollar accelerated after the euro fell when ECB President Lagarde said risks to the economic outlook are tilted to the downside.

Today’s US economic news was mixed for the dollar.  Weekly jobless claims rose more than expected, a dovish factor for Fed policy, while the July Philadelphia Fed business outlook survey rose more than expected, a hawkish factor for Fed policy. 

US weekly initial unemployment claims rose +20,000 to 243,000, showing a weaker labor market than expectations of 229,000.  Also, weekly continuing claims rose +20,000 to a 2-1/2 year high of 1.867 million, showing a weaker labor market than expectations of 1.856 million.

The US July Philadelphia Fed business outlook survey rose +12.6 to 13.9, stronger than expectations of 2.9.

US June leading indicators fell -0.2% m/m, better than expectations of -0.3% m/m.

The markets are discounting the chances for a -25 bp rate cut at 5% for the July 30-31 FOMC meeting and 99% for the following meeting on Sep 17-18.

EUR/USD (^EURUSD) today is down by -0.31%.  The euro today is moderately lower and came under pressure after ECB President Lagarde said, "The risks to economic growth are tilted to the downside.”  Losses in the euro are contained after the ECB kept its main refinancing rate unchanged at 4.25% and said borrowing costs will remain "sufficiently restrictive for as long as necessary" to ensure inflation returns to 2%.

Eurozone June new car registrations rose +4.3% y/y to 1.090 million units.

Eurozone May construction output fell -0.9% m/m, the third straight monthly decline and the biggest drop in 14 months.

The ECB, as expected, kept its main refinancing rate unchanged at 4.25% and said borrowing costs will remain "sufficiently restrictive for as long as necessary" to ensure inflation returns to 2%.  The ECB also said it is "not pre-committing" to a particular rate path and that incoming data will determine the level and duration of policy restriction.

ECB President Lagarde said, "The risks to economic growth are tilted to the downside, and a weaker world economy or an escalation in trade tensions between major economies would weigh on Eurozone growth."  She added that "the question of September and what the ECB will do in September is wide open and will be determined on the basis of all the data that we will be receiving."

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 81% for the September 12 meeting.

USD/JPY (^USDJPY) today is up by +0.33%.  The yen today fell back from a 5-week high against the dollar after rising T-note yields pressured the yen.   Also, weaker-than-expected Japanese trade news for June weighed on the yen.  The yen today initially moved higher on comments from a former BOJ executive who said the BOJ will cut its bond buying at its July 31 policy meeting.

 Japanese trade data was weaker than expected as June exports rose +5.4% y/y, below expectations of +7.2% y/y, and June imports rose +3.2% y/y, below expectations of +9.6% y/y.

Hideo Hayakawa, a former executive at the BOJ, said the BOJ is unlikely to raise interest rates at the July 31 policy meeting and will instead cut its bond buying a little more than expected to avoid any fueling of yen weakness.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 47% for the July 31 meeting and 50% for the September 20 meeting.

August gold (GCQ24) today is up +7.00 (+0.28%), and September silver (SIU24) is up +0.178 (+0.59%).  Precious metals prices today are moderately higher.  Dovish comments today from ECB President Lagarde gave precious metals a boost when she said, "The risks to economic growth are tilted to the downside.”  Also, signs of weakness in the US labor market are dovish for Fed policy and bullish for precious metals after weekly continuing claims rose more than expected to a 2-1/2 year high.  In addition, fund buying of gold supports prices after long gold holdings in ETFs rose to a 3-1/4 month high Wednesday.

Dollar strength today is bearish for metals.  Also, higher T-note yields today are negative for precious metals.  In addition, a recovery in stocks today has reduced safe-haven demand for precious metals.  A bearish factor for silver prices is some negative carryover from today’s fall in copper prices to a 3-1/4 month low. 

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