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London Quick Take - 20 Aug - USD weakens, gold rallies as Treasury buyback move cools bond rout
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
The Treasury announcement should argue for a weaker dollar, since it suggests the administration has drawn a line in the sand for yields - especially when taken together with US encouragement to use the Foreign and International Monetary Authorities (FIMA) facility for FX reserves. This facility lets foreign governments pledge Treasuries as collateral to borrow dollars rather than having to sell those Treasuries outright. This mild form of intervention would require the USD to weaken to offset the fact Treasuries are being supported. And it should argue for the Fed to raise rates since it would require Treasury to issue more front-end treasury bills to finance the buyback...as noted yesterday this muddies the picture for the Fed and for markets – Warsh wants the market to play the ball not the referee but suddenly there’s a streaker on the pitch. More on what the Fed needs to do here and here.
Gold is consolidating just below $4,500 after Wednesday’s US long‑end Treasury buyback announcement sparked a surge of nearly 4% — its biggest move since early August — taking it through the 200-day moving average where we can see a clear resistance level at $4,511 – if this breaks then look to further gains and it seems the bulls are well placed now with the bottoming formation complete and the Treasury move backing a weaker-dollar, lower-rates, gold-positive complex. As I noted yesterday, a policy regime in which the Treasury suppresses long-term yields while fiscal deficits remain elevated is precisely the environment in which investors tend to question the long-run purchasing power of fiat currencies. Lower real yields, a softer dollar and concerns about growing fiscal influence over financial conditions have historically created favourable conditions for gold. The market may therefore view the move not simply as support for Treasuries, but as part of a broader shift towards managing borrowing costs in an increasingly indebted system.
Bitcoin also jumped on the Treasury move to contain long-end yields but also President Trump pressed Congress to pass a key crypto bill as the White House hosted industry executives. Crypto-related stocks like Strategy, Coinbase, MARA, Galaxy Digital and Circle jumped.
Stocks enjoyed a bit of a lift but not clear cut as semis and other AI/tech hardware/infrastructure plays remained under pressure. The S&P 500 rose 0.2% and the Dow gained 0.2%, while the Nasdaq 100 fell 0.2% with the SOXX semis ETF –2% lower with memory stocks heavily sold. Despite this the Korean index rallied sharply – Kospi +6% almost with big gains for the usual pairing. This was the biggest move up since rising 17.9% on 31 July and follows the previous session's decrease of 5.8%. SK Hynix gained +12% on a buyback announcement.
Euro area inflation pressures picked up in July, which should keep ECB policymakers on track to meet expectations by raising rates once again in September. July final CPI rose +2.9%, confirming the preliminary reading, up from +2.8% prior. Core was confirmed rising to +2.5% from +2.4% prior. This morning German factory inflation has hit a three-year high. EURUSD hit a three‑month high of 1.167 as USD weakened after the US Treasury doubled long-term bond buybacks. Rising European natural gas prices are adding to inflation risks and reinforcing expectations of more ECB rate hikes.
Sterling added to gains to break out further beyond 1.36 against the dollar, with cable now at a fresh 3-month high. Bulls now look to test the mid-May peaks around 1.3650, which if broken would take the pair to a 6-month high with 1.37 in sight.
Trump also hit out at Iran, saying the US will launch the “most crushing economic operation ever taken against any country” against the country. Oil prices ticked up with no end in sight for the conflict and meaningful reopening of the Strait of Hormuz, Brent breaking out above the $92 level to around $92.50.
Elsewhere, Target rolled out some strong numbers as the US retail sector stocks report this week. Earnings were flattered by tariff refunds but stronger underlying sales trends meant it also raised its full-year guidance The company reported net sales climbed +5.3%, while comparable sales grew +3.8%, and it hiked its full-year net sales growth guidance by 1ppt to about 5%. Walmart reports later.
It’s not QE and it’s not quite yield curve control, so what is it? The US Treasury announced it would double buybacks of longer-dated Treasuries in the coming months...a kind of Treasury-led Operation Twist to suppress yields at the long end. It's soft-form financial repression, a yield curve control of sorts, which is good for gold and probably bad for the US dollar unless the Fed gets tough. President Trump moaned about “ridiculous interest rates” after...handy timing with an election? Check my note on this here.
As the Treasury announcement hit the wires bond yields dipped sharply and have largely held the move. On that the US dollar weakened to a three-month low and gold prices rose while stocks got a modest lift. The move in the markets was more about the signal from Treasury than anything else. This is the Bessent Put, or to put it another way, it was his Draghi moment – Treasury will do whatever it takes to keep bond yields getting out of control and perhaps more importantly will do what’s required to prevent a destabilising selloff in US Treasuries. Meanwhile, minutes from the 29 July FOMC meeting indicated officials are still willing to hike rates if inflation doesn’t cool...I would argue that the need to raise rates has increased with the Treasury move (implicit easing by Treasury + requires front end issuance). But also watch the scale of operation - it's small enough still that sellers of Treasuries could outgun the move, particularly if USD weakens a lot more, which it might.
As the Treasury announcement hit the wires bond yields dipped sharply and have largely held the move. On that the US dollar weakened to a three-month low and gold prices rose while stocks got a modest lift. The move in the markets was more about the signal from Treasury than anything else. This is the Bessent Put, or to put it another way, it was his Draghi moment – Treasury will do whatever it takes to keep bond yields getting out of control and perhaps more importantly will do what’s required to prevent a destabilising selloff in US Treasuries. Meanwhile, minutes from the 29 July FOMC meeting indicated officials are still willing to hike rates if inflation doesn’t cool...I would argue that the need to raise rates has increased with the Treasury move (implicit easing by Treasury + requires front end issuance). But also watch the scale of operation - it's small enough still that sellers of Treasuries could outgun the move, particularly if USD weakens a lot more, which it might.
The Treasury announcement should argue for a weaker dollar, since it suggests the administration has drawn a line in the sand for yields - especially when taken together with US encouragement to use the Foreign and International Monetary Authorities (FIMA) facility for FX reserves. This facility lets foreign governments pledge Treasuries as collateral to borrow dollars rather than having to sell those Treasuries outright. This mild form of intervention would require the USD to weaken to offset the fact Treasuries are being supported. And it should argue for the Fed to raise rates since it would require Treasury to issue more front-end treasury bills to finance the buyback...as noted yesterday this muddies the picture for the Fed and for markets – Warsh wants the market to play the ball not the referee but suddenly there’s a streaker on the pitch. More on what the Fed needs to do here and here.
Gold is consolidating just below $4,500 after Wednesday’s US long‑end Treasury buyback announcement sparked a surge of nearly 4% — its biggest move since early August — taking it through the 200-day moving average where we can see a clear resistance level at $4,511 – if this breaks then look to further gains and it seems the bulls are well placed now with the bottoming formation complete and the Treasury move backing a weaker-dollar, lower-rates, gold-positive complex. As I noted yesterday, a policy regime in which the Treasury suppresses long-term yields while fiscal deficits remain elevated is precisely the environment in which investors tend to question the long-run purchasing power of fiat currencies. Lower real yields, a softer dollar and concerns about growing fiscal influence over financial conditions have historically created favourable conditions for gold. The market may therefore view the move not simply as support for Treasuries, but as part of a broader shift towards managing borrowing costs in an increasingly indebted system.
Bitcoin also jumped on the Treasury move to contain long-end yields but also President Trump pressed Congress to pass a key crypto bill as the White House hosted industry executives. Crypto-related stocks like Strategy, Coinbase, MARA, Galaxy Digital and Circle jumped.
Stocks enjoyed a bit of a lift but not clear cut as semis and other AI/tech hardware/infrastructure plays remained under pressure. The S&P 500 rose 0.2% and the Dow gained 0.2%, while the Nasdaq 100 fell 0.2% with the SOXX semis ETF –2% lower with memory stocks heavily sold. Despite this the Korean index rallied sharply – Kospi +6% almost with big gains for the usual pairing. This was the biggest move up since rising 17.9% on 31 July and follows the previous session's decrease of 5.8%. SK Hynix gained +12% on a buyback announcement.
Euro area inflation pressures picked up in July, which should keep ECB policymakers on track to meet expectations by raising rates once again in September. July final CPI rose +2.9%, confirming the preliminary reading, up from +2.8% prior. Core was confirmed rising to +2.5% from +2.4% prior. This morning German factory inflation has hit a three-year high. EURUSD hit a three‑month high of 1.167 as USD weakened after the US Treasury doubled long-term bond buybacks. Rising European natural gas prices are adding to inflation risks and reinforcing expectations of more ECB rate hikes.
Sterling added to gains to break out further beyond 1.36 against the dollar, with cable now at a fresh 3-month high. Bulls now look to test the mid-May peaks around 1.3650, which if broken would take the pair to a 6-month high with 1.37 in sight.
Trump also hit out at Iran, saying the US will launch the “most crushing economic operation ever taken against any country” against the country. Oil prices ticked up with no end in sight for the conflict and meaningful reopening of the Strait of Hormuz, Brent breaking out above the $92 level to around $92.50.
Elsewhere, Target rolled out some strong numbers as the US retail sector stocks report this week. Earnings were flattered by tariff refunds but stronger underlying sales trends meant it also raised its full-year guidance The company reported net sales climbed +5.3%, while comparable sales grew +3.8%, and it hiked its full-year net sales growth guidance by 1ppt to about 5%. Walmart reports later.
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