The dollar index (DXY00) on Friday fell by -0.19%. The dollar was under pressure on Friday after the S&P 500 rallied to a new all-time high, curbing liquidity demand for the dollar. Also, the University of Michigan’s US May consumer sentiment index fell more than expected to a record low. In addition, strength in the Chinese yuan weighed on the dollar today after the yuan rallied to a 3-year high. Finally, strength in EUR/USD is negative for the dollar after hawkish ECB comments pushed the euro higher.
Friday’s US payroll report was mixed for the dollar after nonfarm payrolls rose more than expected, but hourly earnings rose less than expected.
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In the latest developments in the Middle East, Iran’s semi-official Tasnim news agency said Iran seized an oil tanker on Friday in the Strait of Hormuz for “attempting to disrupt oil exports and the interests of the Iranian nation.” Also, US forces targeted missile and drone launch sites and other military assets in Iran that were responsible for attacking three US Navy destroyers transiting the Strait of Hormuz.
The markets are awaiting further updates after the US presented a proposal to Iran that would gradually reopen the Strait of Hormuz and lift the US blockade on Iranian ports. Negotiations over Iran’s nuclear program would come later in the process. Iran is expected to respond via Pakistan in the next few days.
US Apr nonfarm payrolls rose by +115,000, stronger than expectations of +65,000, and Mar nonfarm payrolls were revised upward to +185,000 from the previously reported +178,000. The Apr unemployment rate was unchanged at 4.3%, right on expectations.
US Apr average hourly earnings rose +0.2% m/m and +3.6% y/y, weaker than expectations of +0.3% m/m and +3.8% y/y.
The University of Michigan’s US May consumer sentiment index fell -1.6 to a record low of 48.2 (data from 1978), weaker than expectations of 49.5.
The University of Michigan US May 1-year inflation expectations rate unexpectedly eased to 4.5% from 4.7% in Apr, below expectations of a rise to 4.8%. The May 5-10 year inflation expectations rate unexpectedly eased to 3.4%, weaker than expectations of no change at 3.5%.
Swaps markets are discounting the odds at 6% for a 25 bp rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Friday rose by +0.47%. The euro rallied on Friday amid hawkish ECB comments that suggest the ECB may raise interest rates at its next meeting in June if the US-Iran war continues and the Strait of Hormuz remains closed. German economic news on Friday was mixed for the euro. Trade news for March was better than expected, although industrial production unexpectedly declined.
German Mar industrial production unexpectedly fell by -0.7% m/m, weaker than expectations of a+0.4% m/m increase.
German trade news was better than expected, with Mar exports rising +0.5% m/m, stronger than the -1.5% m/m decline expected. Also, Mar imports rose +5.1% m/m, stronger than expectations of +0.5% m/m and the biggest increase in 2.75 years.
ECB Vice President Luis de Guindos said the most important determinant for interest rates at the ECB’s June meeting will be “whether Hormuz is reopened or not.”
ECB Executive Board member Isabel Schnabel said, “If the energy-price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability.”
ECB Governing Council member and Bundesbank President Joachim Nagel said the ECB is “highly vigilant” to rising inflation risks due to the Iran war and will act as needed to prevent higher energy costs spilling over into prices more broadly.
Swaps are discounting a 79% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.
USD/JPY (^USDJPY) on Friday fell by -0.14%. The yen moved higher on Friday, supported by a weaker dollar. Also, the decline in T-note yields on Friday was supportive of the yen. The yen has carryover support from Wednesday, when Japanese authorities intervened in the forex market to support the yen. Limiting gains in the yen were Friday’s Japanese economic reports, which showed a downward revision to the Apr S&P services PMI and weaker-than-expected March labor cash earnings.
The Japan Apr S&P services PMI was revised downward by -0.2 to 51.0 from the previously reported 51.2.
Japan Mar labor cash earnings rose +2.7% y/y, weaker than expectations of +3.2% y/y.
The markets are discounting a +73% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.
June COMEX gold (GCM26) on Friday closed up +19.80 (+0.42%), and July COMEX silver (SIN26) closed up +0.685 (+0.85%).
Gold and silver prices settled higher on Friday due to a weaker dollar. Also, lower global bond yields on Friday were bullish for precious metals. In addition, concerns about the sustainability of the US-Iran ceasefire have boosted some safe-haven demand for precious metals after Iran seized an oil tanker on Friday in the Strait of Hormuz and US forces launched attacks against missile and drone launch sites and other military assets in Iran that were responsible for attacking three US Navy destroyers transiting the Strait of Hormuz.
Friday’s rally in the S&P 500 to a new record high limited the safe-haven demand for precious metals. Also, hawkish comments on Friday from ECB Vice President Luis de Guindos, ECB Executive Board member Isabel Schnabel, and ECB Governing Council member Joachim Nagel suggested the ECB is considering raising interest rates at its June policy meeting, a bearish factor for precious metals.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 4.5-month low on March 31 after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to an 8.75-month low on Tuesday after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following Thursday’s news that bullion held in China’s PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.
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
