From the Floor: Dollar firms as rate optimism grows
By Clare MacCarthy
- December rate hike is 65% priced in – Juhl-Larsen
- Two hikes possible if the data cooperate – Hardy
- USDJPY could return to the top of its range – Hardy
- We've seen a dramatic reaction in fixed income – Boye
- Oil has been left vulnerable after shorts cull – Hansen
- Gold is testing key support at $1,313/oz – Hansen
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As the tumultuous central banker gathering at Jackson Hole over the weekend fades into the rear view mirror, investors and traders have set their sights on this week's main event – Friday's August nonfarm payrolls. While this is always an important data point, it's more important that usual this time around after Fed chief Janet Yellen and her deputy Stanley Fischer raised the hawkish possibility of a pair of US rate hikes before year's end.
Indeed, the rate hike odds have already risen (chart above). "A December rate hike is 65% priced in and a strong nonfarm payrolls could easily send this to 75%," says Dan Juhl Larsen, speaking during Saxo Bank's daily morning conference call. Meanwhile, the US dollar is broadly firmer in the wake of a rather chaotic Friday which saw it trading "all over the map" in the words of John J Hardy, Saxo's head of FX strategy. "First it was stronger, than much weaker then stronger again" on Fischer's comments that Yellen saw not just one, but two, rate hikes this year as a possibility "if the data cooperates".
Besides Friday's NFP, upcoming key US data points include PCE July inflation at 1230 GMT today. "This is the Fed's most important measure of inflation, it's expected to dip back to 1.5% year over year but if the figure comes out at 1.6% or above it would lead the dollar higher still," Hardy says.
As to the immediate outlook for the greenback, Hardy says that in theory we could go all the way back to the top of the range in USDJPY (107.48 on the chart below) but that that would require "some pretty powerful data".
USDJPY looking into an Ichimoku cloud:
Elsewhere, the Jackson Hole high jinks left their imprint on bonds too: "There's been quite a dramatic reaction in fixed income to the speeches and soundbytes," says Michael Boye of Saxo's fixed income trading desk. Two-year treasuries have jumped to a 3-month high, he says, but adds a cautionary note that despite the upbeat tone that liquidity could suffer today because of a UK bank holiday.
Gold is testing key support towards $1,313:
Finally, to the world of commodities, where Ole Hansen reports that the market is suffering a bout of weakness "as the dollar shows its teeth again". But the main news this morning is the speculative data where we're seeing some incredibly crazy moves in the oil markets. Last week, he says, we once again saw a major cull of short positions in the oil market. This means that over the past three weeks the number of long positions has tripled while there's been an 85% decrease in the shorts. This, says the Saxo head of commodity strategy, leaves oil vulnerable to weakness.
Gold, too, is in a bit of a pickle this morning, under pressure from the increasing rate hike expectations, stronger dollar and rising bond yields, and is testing key support at $1,313/oz.
A strong NFP on Friday would see rate expectations rocket. Pic: iStock
Clare MacCarthy is deputy editor at TradingFloor.com
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