The Dollar, Geopolitics As Usual, And Q2 Earnings Driving The Train

Gold is stumbling around right now, having fallen victim to a rising U.S. dollar today, which is more than counteracting a slight rise in regular trading. Silver is faring a little worse and palladium is taking a shellacking, down about 1.7% on the session.

The greenback strengthened further today on Fed Chairwoman Janet Yellen’s comments before the U.S. Congress yesterday. She again stressed that a rate rise will occur this year. As we pointed out yesterday, we can’t believe conditions will warrant such a move.

To get the truest market take on the potential rate hike, it’s better to keep our eyes on the 10-year yield on the U.S. bond. While it is certainly well of its late March levels of below 2.0%, it is still 0.25 away from the 12-month high of around 2.60. Similarly, it is off the more recent (late June) high of 2.49%. The 10-year gives up all sorts of indications of sentiment.

If the big investors and traders really believed Yellen, we would be witnessing a heavier surge in the yield.

On the other side of the discussion, though, it is clear that many in the currency trading area are feeling bullish about the buck. While we can’t entirely dismiss the worries over a Fed rate move in this arena, our thought is that the dollar is serving as both a haven and a bit of a holding tank for “undecided” money. Park the cash, sniff around, then – maybe till after earnings season – put that money into something else.

The dollar is up against the yen and British pound, as well as the euro, but in a much less convincing way.

Crude oil is the most interesting trade in the markets at the moment.

West Texas Intermediate tried to scramble back to $52 per barrel today, but by the end of day it traded below $51.00. Even the mere promise of Iran coming back online to sell to Europe is weighing on Texas. Brent North Sea oil also tried to rebound today and also ended down, though marginally. 

A bit of support in Brent is came from an outage at Buzzard, Britain’s largest oil field, caused by a power supply problem. The off-lining of about 180,000 barrels per day should not last long. And, let’s not forget that we still have overproduction mainly due to OPEC pumping of more than 2.5 million bpd.

Demand in the U.S., based on gasoline consumption remains high and so there was a drain of approximately 4.3 million barrels from inventories. Gasoline refineries are working frenetically in the United States to keep up with demand, in fact.

We are of the wait-and-see school concerning the Iran nuclear deal. If pressed, we would say that there will be much wailing and gnashing of teeth by mostly chicken hawk Republicans and staunch pro-Israel Democrats. But, eventually the deal will pass because the alternative is too grim.

The loser in this game of oil musical chairs is going to be Russia, which if Iran is actually brought back into the international fold, will find its headlock on the European market broken quite thoroughly.

Wishing you as always, good trading,