Dollar Soars on Fed Rate Hike Expectations

The yen initially moved higher on Friday due to stronger-than-expected Japanese economic reports on Apr household spending and Apr labor cash earnings, which were hawkish for BOJ policy.  Also, the closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level.

The Japan Apr leading index CI rose +0.5 to a 4.25-year high of 115.9, stronger than expectations of 114.5.

Japan Apr labor cash earnings rose +3.5% y/y, stronger than expectations of +3.1% y/y and the fastest pace of increase in 16 months.

Japan Apr household spending fell -0.5% y/y, a smaller decline than expectations of -1.5% y/y.

The markets are discounting a +94% chance of a +25 bp BOJ rate hike at the next policy meeting on June 16.

August COMEX gold (GCQ26) on Friday closed down -139.70 (-3.10%), and July COMEX silver (SIN26) closed down -4.868 (-6.68%).

Gold and silver prices plummeted to 2.5-month lows on Friday and settled sharply lower.  Friday’s rally in the dollar index to a 1.75-month high sparked long liquidation in metals prices.  Also, Friday’s stronger-than-expected US May payroll report bolsters the outlook for a Fed rate hike, a bearish factor for precious metals prices.  In addition, higher global bond yields on Friday were negative for precious metals.

Precious metals still have safe-haven support as the US and Iran have made little progress in talks over an interim peace deal, with clashes between Israel and Hezbollah militants ongoing in Lebanon.  Also, Friday’s plunge in stocks boosted some safe-haven buying of precious metals.

Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.5-month low on March 31 after climbing to a 3.5-year high on February 27.  Also, long holdings in silver ETFs fell to a 9.75-month low on Thursday after rising to a 3.5-year high on December 23.

Strong central bank demand for gold is supportive of gold prices, following 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