The dollar index (DXY00) on Friday fell to a 1.5-week low and finished down by -0.08%. The dollar gave up early gains last Friday and moved lower on increased chances that the Fed will cut interest rates at next month’s FOMC meeting. Swaps markets now discount an 83% chance of a Fed rate cut next month, up from 30% last week, weighing on the dollar. Strength in stocks on Friday also limited liquidity demand for the dollar.
The dollar is also under pressure after Bloomberg reported on Tuesday that Kevin Hassett is at the top of the list of potential candidates to succeed Jerome Powell as US Fed Chair. Hassett’s nomination would be bearish for the dollar as he is seen as a dovish candidate. Also, Fed independence would come into question, as Hassett supports President Trump’s approach to cutting interest rates at the Fed, which Trump has long sought to control.
The markets are discounting an 83% chance that the FOMC will cut the fed funds target range by 25 bp at the next FOMC meeting on December 9-10.
EUR/USD (^EURUSD) on Friday rose by +0.05%. The euro recovered from early losses on Friday and posted modest gains as the dollar weakened. The euro also garnered support after the Eurozone’s Oct 1-year inflation expectations unexpectedly increased and the German Nov CPI rose more than expected, hawkish factors for ECB policy. An unexpected decline in Friday’s German Oct retail sales report was bearish for the euro.
Eurozone Oct 1-year inflation expectations unexpectedly increased to +2.8% from +2.7% in Sep, stronger than expectations of an easing to 2.6%. Oct 3-year expectations remained unchanged at 2.5%, right on expectations.
German Oct retail sales unexpectedly fell -0.3% m/m, weaker than expectations of an increase of +0.2% m/m.
German Nov CPI (EU harmonized) rose +2.6% y/y, stronger than expectations of +2.4% y/y and the largest increase in 9 months.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the December 18 policy meeting.
USD/JPY (^USDJPY) on Friday fell by -0.12%. The yen rose on Friday amid better-than-expected Japanese industrial production and retail sales reports. Also, the Nov Tokyo CPI remained above 2%, a hawkish factor for BOJ policy. The yen fell back from its best level after T-note yields rose.
Signs of weakness in Japan’s labor market limited gains in the yen on Friday after Japan’s Oct jobless rate was unchanged at 2.6%, versus expectations of a decline to 2.5%, suggesting a weaker labor market than expected. Also, the Oct job-to-applicant ratio unexpectedly eased to 1.18, weaker than expectations of no change at 1.20.
Japan’s Oct industrial production unexpectedly rose +1.4% m/m, stronger than expectations of a -0.6% m/m decline.
Japan Oct retail sales rose +1.6% m/m, stronger than expectations of +0.8% m/m and the biggest increase in 5 years.
Japan Nov Tokyo CPI rose +2.7% y/y, right on expectations. Nov Tokyo CPI ex-fresh food and energy rose +2.8% y/y, right on expectations.
The Japan Oct jobless rate was unchanged at 2.6%, showing a weaker labor market than expectations of a decline to 2.5%. The Oct job-to-applicant ratio unexpectedly eased to 1.18, weaker than expectations of no change at 1.20.
The markets are discounting a 59% chance of a BOJ rate hike at the next policy meeting on December 19.
December COMEX gold (GCZ25) on Friday closed up +53.10 (+1.27%), and December COMEX silver (SIZ25) closed up +0.639 (+1.27%).
Gold and silver prices rallied sharply on Friday, with gold posting a 2-week high and nearest-futures silver (Z25) soaring to a new all-time high of $56.46 a troy ounce.
Expectations that the Fed will cut interest rates at next month’s FOMC meeting are boosting demand for precious metals as a store of value. The markets are discounting an 83% chance that the FOMC will cut the fed funds target range by 25 bp at next month’s FOMC meeting, up from 30% last week. Trading in metals markets was subdued on Friday after a technical outage at the Chicago Mercantile Exchange disrupted trading in gold and silver futures and options on the Comex.
Demand for precious metals as a store of value has also increased after Bloomberg reported on Tuesday that Kevin Hassett is leading the field as the potential next US Fed Chair to replace Jerome Powell. Hassett is seen as a dovish, pro-liquidity candidate, and his nomination would question the Fed’s independence, as Hassett supports President Trump’s approach to cutting interest rates at the Fed, which Trump has long sought to control.
Also, precious metals have underlying safe-haven demand amid uncertainty over US tariffs, geopolitical risks, and central bank buying.
Concerns over tightness in Chinese silver supplies are a bullish factor for silver prices. Silver inventories in warehouses linked to the Shanghai Futures Exchange have fallen to the lowest level in 10 years.
On the negative side of precious metals was Friday’s rally in stocks, which reduced safe-haven demand for precious metals. Also, improving prospects for an end to the war in Ukraine have curbed safe-haven demand for precious metals.
Strong central bank demand for gold is supportive of prices, following the most recent news that showed bullion held in China’s PBOC reserves rose to 74.09 million troy ounces in October, the twelfth consecutive month the PBOC has boosted its gold reserves. Also, the World Gold Council recently reported that global central banks purchased 220 MT of gold in Q3, up 28% from Q2.
Since posting record highs in mid-October, long liquidation pressures have weighed on precious metals prices. Holdings in gold and silver ETFs have recently fallen after posting 3-year highs on October 21.
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.
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