• 203 days Could Crypto Overtake Traditional Investment?
  • 208 days Americans Still Quitting Jobs At Record Pace
  • 210 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 213 days Is The Dollar Too Strong?
  • 213 days Big Tech Disappoints Investors on Earnings Calls
  • 214 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 216 days China Is Quietly Trying To Distance Itself From Russia
  • 216 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 220 days Crypto Investors Won Big In 2021
  • 220 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 221 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 223 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 224 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 227 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 228 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 228 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 230 days Are NFTs About To Take Over Gaming?
  • 231 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 234 days What’s Causing Inflation In The United States?
  • 235 days Intel Joins Russian Exodus as Chip Shortage Digs In
  1. Home
  2. Markets
  3. Other

Gold and Yields Conspire on Dollar Decline

There was no surprise in today's release of the October ISM Manufacturing survey showing a decline to 51.2-- lowest since June 2003 -- considering the 0.84 correlation between the ISM manufacturing and the Chicago PMI over the past 8 years, and the 16-month low in yesterday's Chicago survey.

The essential relevance of the ISM report to FX and bond markets is the plunge in the prices paid index to a 4-year low of 47 in October, from September's 61, affirming that pricing power is on the decline, reducing the inflation argument for the Federal Reserve. The chat below shows how the prices paid indices of major business surveys remain on the decline.

Meanwhile, the inter-market development are in place for further declines in the US dollar, as bond yields hit 4-week lows (prices in 4-week highs) and gold prices rally to 3 ½ week highs. The upper chart on the right shows prices on the Dec 10-year futures contract, which are inversely proportional to their falling yields. With much ink already spilled on the unwinding of yen carry trades, the exodus out of these plays is yet to unfold as investors hope to collect on the yield differential. But as the downdraft of carry trades has shown in the past (Aug-Sep 1998, and April 2006), rapid gains in low yielding currencies can swiftly erase the yield carry. With gold prices above their 200-day moving average and the Japanese yen already down 2.5% from its high, the pair is ripe for further declines. We stick with our year-end forecast of 114. But before that, markets need to tackle the 116.00 figure, followed by the key support at 115.70 -- 38% retracement of the rise from the May 19 low.

Finally, although both long and short term yields are on the decline, the 10-2 year yield spread has quietly shrunk from -0.1% last week to today's -0.08% today. This suggests that further data weakness in the US will step up more downward pressure on the short-end than on the long end, at which point treasury futures will give us better clarity as to when the Federal Reserve will begin easing monetary policy. Dollar bears may not find much to cheer about in the expected bounce in October nonfarm payrolls (to 110K from 51K), but a another 0.2% reading in average hourly earnings and an upward creep in the unemployment rate may do the trick.

 

Back to homepage

Leave a comment

Leave a comment