The dollar index (DXY00) on Wednesday fell by -0.37% and posted a 1-week low.  Wednesday’s rally in the S&P 500 to a new record high curbed the liquidity demand for the dollar.  The dollar was also under pressure from the rally in the yen to a 1-week high against the dollar on strength in Japanese government bond yields. The dollar recovered from its worst levels when T-note yields rose after the U.S. Jan S&P manufacturing PMI unexpectedly expanded.

Wednesday’s U.S. economic news was better-than-expected and bullish for the dollar after the Jan S&P manufacturing PMI unexpectedly rose +2.4 to 50.3, stronger than expectations of a decline to 47.6 and the fastest pace of expansion in 15 months.

The markets are discounting the chances for a -25 bp rate cut at 3% for the next FOMC meeting on Jan 30-31 and a 42% chance for that -25 bp rate cut for the following meeting on March 19-20.

EUR/USD (^EURUSD) on Wednesday rose by +0.28% and posted a 1-week high.  Dollar weakness Wednesday was bullish for the euro.  Also, stronger-than-expected Eurozone manufacturing activity gave the euro a boost after the Eurozone Jan S&P manufacturing PMI rose more than expected to a 10-month high.  Finally, some short covering in EUR/USD ahead of Thursday’s ECB meeting supported the euro. 

The Eurozone Jan S&P manufacturing PMI rose +2.2 to a 10-month high of 46.6, stronger than expectations of 44.7.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 2% for its next meeting on January 25 and 15% for the following meeting on March 7.

USD/JPY (^USDJPY) on Wednesday fell by -0.52%.  On Wednesday, the yen climbed to a 1-week high against the dollar.  Signs of strength in Japan’s economy boosted the yen after Wednesday’s trade news showed Japan’s Dec exports rose by the most in a year.  Also, strength in Japanese government bond yields supported the yen after the 10-year JGB bond yield rose to a 6-week high Wednesday at 0.749%.  The yen also has carryover support from Tuesday when comments from BOJ Governor Ueda bolstered speculation the BOJ is close to ending its negative interest rate campaign. 

The Japan Jan Jibun Bank manufacturing PMI rose +0.1 to 48.0.

Japan Dec exports rose +9.8% y/y, stronger than expectations of +9.2% y/y and the biggest increase in a year.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 32% for its next meeting on March 19 and at 71% for the following meeting on April 26.

February gold (GCG4) Wednesday closed -9.80 (-0.48%), and Mar silver (SIH24) closed +0.427 (+1.90%).  Precious metals on Wednesday settled mixed.  Wednesday’s rally in the S&P 500 to a new record high curbed safe-haven demand for precious metals and pressured gold prices.  Gold is also being undercut by the ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Tuesday. 

The decline in the dollar index Wednesday to a 1-week low was bullish for precious metals.  Also, gold has support as a store of value after the PBOC cut its reserve requirement ratio for banks by 50 bp, boosting liquidity. Silver found support Wednesday on signs of strength in global manufacturing activity after the U.S. and Eurozone Jan S&P manufacturing PMIs rose more than expected, a positive factor for industrial metals demand.



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