Trade Deal Hits Dollar, Gold Hard
Hello! Today, I've brought this exciting topic to you! We're diving deep into the financial markets to unravel how a recent US-China trade agreement is shaking things up for the dollar and precious metals. Grab your coffee, because there's a lot to unpack!
The US dollar index (DXY00) is feeling a bit under the weather today, showing a slight dip of -0.06%. What's causing this? Primarily, the preliminary US-China trade agreement has reduced the dollar's appeal as a safe-haven asset. When global tensions ease, investors tend to move away from traditionally safe currencies like the dollar.
But that's not all! We're also seeing some lingering weakness from last Friday's September US CPI report. Both the nominal and core figures came in at +3.0% year-over-year, just shy of the +3.1% expectations. This slightly weaker-than-anticipated inflation data has a "dovish" implication for the Federal Reserve's policy, suggesting they might be more inclined to cut interest rates.
Speaking of rate cuts, the markets are practically shouting about it! There's a whopping 97% chance priced in for a -25 basis point rate cut at this week's FOMC meeting (October 28-29). This potential rate cut is generally bearish for the dollar.
Adding to the dollar's woes is the ongoing US government shutdown. The longer it drags on, the more economic damage it inflicts, further pushing the Fed towards rate cuts. However, it's not all doom and gloom for the dollar; it did find some underlying support today from a +1.7 basis point rise in the US 10-year T-note yield.
Example: Imagine the dollar as a sturdy umbrella. When a storm (like trade tensions) is brewing, everyone huddles under it. But when the skies clear (trade agreement!), people put their umbrellas down, and its perceived value drops.
The big news stirring the markets is the tentative trade agreement between the US and China. Negotiators met in Malaysia over the weekend and hammered out a deal that's set to be finalized at Thursday's summit between Presidents Trump and Xi during the Asia-Pacific Economic Cooperation conference in South Korea.
Here's a quick rundown of what's on the table:
- Tariffs Off! Treasury Secretary Bessent announced that the US threat of a 100% tariff on US imports from China, which was slated for November 1, is now "effectively off the table." Phew!
- China's Commitments: China has agreed not to restrict the export of rare earth metals for at least one year and to purchase a "substantial" amount of US soybeans. This is a win for US agriculture!
- Other Progress: The two sides also made headway on shipping fees and US demands for China to crack down on the export of fentanyl and its precursors to the US. There's even talk of a potential agreement to allow US consumers continued access to TikTok.
Example: Think of this trade deal as a complex negotiation for a big business merger. Both sides made concessions to reach a tentative agreement, hoping to finalize the terms and avoid a costly trade war. The removal of the 100% tariff threat is like the biggest hurdle being cleared.
While the dollar takes a breather, other major currencies are reacting.
- Euro's Boost: The EUR/USD (^EURUSD) is trading slightly higher by +0.09%, largely benefiting from the dollar's weakness. The euro also got a lift from a stronger-than-expected German IFO business climate index, which rose +0.7 points to 88.4 (beating expectations of 88.0). Swaps are currently pricing in a minimal 1% chance of a -25 bp rate cut by the ECB at their October 30 policy meeting, which also lends some stability to the euro.
- Yen's Position: The USD/JPY (^USDJPY) is up +0.12%. Interestingly, the article states it's "seeing support from dollar weakness," which, in the context of USD/JPY, implies the dollar is gaining against the yen, or the yen itself is showing weakness relative to the dollar. This highlights the complex interplay of factors affecting individual currency pairs.
Example: Imagine a seesaw. When the dollar side goes down (due to trade deal and dovish Fed outlook), the euro side tends to go up, as investors look for alternative strong currencies. The yen's movement, however, might be influenced by its own unique domestic factors or specific investor flows.
Gold and silver, often seen as ultimate safe havens, are taking a significant hit today.
- Gold's Plunge: December COMEX gold (GCZ25) is down a hefty -133.9 (-3.24%), hitting a new 2-week low.
- Silver's Slide: December COMEX silver (SIZ25) is also down -2.186 (-4.50%).
The primary culprit for this sharp decline? You guessed it – the reduced safe-haven demand stemming from the US-China preliminary trade agreement. When geopolitical risks subside, the allure of gold and silver diminishes, leading to heavy long liquidation pressures after their significant rallies over the past two months.
However, don't write them off completely! There's still underlying safe-haven support from several factors:
- The ongoing US government shutdown.
- Lingering uncertainty over US tariffs (despite the recent agreement, trade relations can be volatile).
- Broader geopolitical risks.
- Continued central bank buying of gold.
- President Trump's pressure on the Fed's independence, which adds an element of uncertainty.
- Recent weaker-than-expected US economic news, bolstering the outlook for the Fed to keep cutting interest rates (a traditionally bullish factor for precious metals).
Despite these supports, precious metals are also facing pressure from ETF outflows. Gold holdings in ETFs have fallen back after reaching a 3-year high last Tuesday, and silver holdings in ETFs also saw declines from a 3.25-year high last Tuesday. This indicates investors are pulling out their money, contributing to the price drops.
Example: Think of gold and silver as emergency bunkers. When there's a perceived threat (like a trade war), everyone rushes to them. But if the threat lessens, people leave their bunkers, and the value of those bunkers might temporarily decrease as supply outweighs demand.
Q2. What are the key elements of the tentative US-China trade agreement detailed in the article?
A. The key elements include the US threat of 100% tariffs on Chinese imports being "effectively off the table," China agreeing not to restrict rare earth metal exports for at least one year, China buying a "substantial" amount of US soybeans, and progress on shipping fees, fentanyl crackdown, and potentially TikTok access.
Q3. Despite some underlying support, what is the main reason for the significant drop in gold and silver prices today?
A. The main reason for the drop in gold and silver prices is the reduced safe-haven demand resulting from the US-China preliminary trade agreement, coupled with heavy long liquidation and ETF outflows.