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Article / 24 August 2016 at 7:35 GMT

FX Update: USD surviving latest assault as we await Yellen

Head of FX Strategy / Saxo Bank
  • USD regains its footing as wait for Yellen drags on
  • ZAR pressured by police probe of South African finmin
  • S&P downgrade of Mexico hurts the peso

The dollar held its ground late Tuesday as Jackson Hole looms. Photo: iStock

By John J Hardy

The USD has firmed again since late yesterday after the recent bout of weakening as it appears traders don’t want to press their case ahead of Friday’s Janet Yellen speech. Data from the US was mixed yesterday, with a terrible Richmond Fed survey suggesting widespread weakness in manufacturing after ugly Empire and Philly Fed survey numbers – if the manufacturing sector in the US is a leading indicator, this does not bode well, though we’ll need a couple of months of data if we’re to believe the improving trend of the last several months is turning back lower. Elsewhere, the US July New Home Sales data jumped well beyond expectations and to a new high since 2007. 

Late yesterday, the South African police summoned the country’s finance minister, a reminder of the political fragility in the country. This sparked a sharp selloff in the ZAR, perhaps aggravated by signs that the recent surge in EM currencies was easing ahead of this Friday’s Yellen speech. Also on the EM front, an S&P downgrade to Mexico’s peso hit the EM’s most liquid currency and provided a further headwind for the sector.

Chart: AUDUSD versus rate spreads, copper

It's hard to see what is supporting AUDUSD (black line) here near the top of the bigger picture range besides the global reach for any yield available, as interest rate compression between Australia and the US has continued apace and commodity prices have even turned a bit lower again – watching the 0.7600 area after Yellen's speech on Friday, as a big break below suggests more downside to come in the large range towards 0.6900 and beyond.

 Source: Bloomberg

The G-10 rundown

USD – the critical question around the Jackson Hole speech by Fed chair Yellen, as alluded to in my article yesterday, is not only what the Fed says, but how the market reads it. The noise on the short-term prospects of one or two rate hikes is less interesting (to me, at least) than the longer-term hints on the Fed’s policy stance. 

On the surface, it looks dovish if the Fed indicates that the longer-term natural interest rate is much lower than previously (meaning Fed responsiveness to strong data lower and terminal policy rate for cycle much lower, too), but it also could suggest that the Fed is less interested in joining the Bank of Japan and the European Central Bank down the rabbit hole of further QE and negative interest rates if it strongly indicates, as per recent John Williams’ essay and Stanley Fischer speech, that the fiscal authority bears increasing responsibility.

EUR – little to go on here for now as volatility collapse continues. Long term political questions are perhaps the most interesting to track.

JPY – 100.00 looking rock solid at least until Yellen speech – and even if market reacts sharply either way after that speech, USDJPY will inevitably look nervy until Sep 21 when central bank meetings are scheduled both for the US and Japan.

GBP – BBA loans data today could be an excuse for market to either pull sterling higher on a continued squeeze through the 1.3200 level in GBPUSD or smash it back toward the range lows. EURGBP looks pivotal as well after 0.8600 area gave way yesterday.

CHF – no story here until interest rates rise, in which case, USDCHF might be ready to rally again.

AUD – as we highlight above, fundamentals like weakening commodity prices and compressing rate spreads should be weighing more on the AUD than we have seen thus far – perhaps there is a link with the general “reach for yield” theme and a chunkier sell-off requires a turn for the worse in risk appetite.

CAD – USDCAD turning higher after a sharp dip yesterday – looks promising for the bulls if we can close above 1.3000 this week.

NZD – The 0.7300/50 zone in NZDUSD once again turns back the bulls, but the bears can’t get any satisfaction either as we await Yellen’s ability to hold sway after this Friday’s speech.

SEK – the first interesting data in a while up tomorrow in the form of confidence surveys and . SEK cheap, but Sweden’s economy too dependent on credit steroids and looks very poorly positioned longer term.

NOK – look out for the Q3 oil investment survey, which reveals the scale of planned investment in energy projects in Norway and could provide a directional signal. While the rate outlook for Norway has stabilized, ongoing high CPI inflation relative to the policy rate (i.e., the real interest rate) is a strong drag on the currency’s fundamentals.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0800 – Norway Q3 Oil Investment Survey 
  • 0830 – UK Jul. BBA Loans for House Purchase 
  • 1400 – US Jul. Existing Home Sales 

– Edited by Clare MacCarthy

John J Hardy is head of FX strategy at Saxo Bank


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