Talking Points:

Dollar Hits New 12-Month High, Forecasts for Early Fed Hike Buildings
Euro Dives to Start the Week Following Draghi’s Jackson Hole Warning
Yen Crosses: USDJPY Deviates Further from the Pack

Dollar Hits New 12-Month High, Forecasts for Early Fed Hike Buildings

The Dollar is looking more and more robust. Despite a hearty appetite for risk assets to start the week (working against the greenback’s safe haven status) and little sign that the market was re-pricing its Fed forecasts, the greenback gapped up to open the week. This bullish thrust sent the Dow Jones FXCM Dollar Index (ticker = USDollar) to a six-month high. Amongst the majors, EURUSD dropped to its lowest level in a year while USDJPY notched a modicum of progress on its crawl to seven-month highs. From the two aforementioned majors, we may be looking at a temporary market element at play: gains founded in counterparty weakness. For the dollar itself, there is little demand for liquidity to push the market to seek out haven. As for the currency’s more pressing theme of late – rate expectations – neither Treasury yields nor Fed Funds futures have taken traction. That said, the number of non-market surveys (economists and hedge funds) suggesting a growing call for an earlier first Fed hike are making for more dramatic headlines. Will traders adopt this outlook?

Euro Dives to Start the Week Following Draghi’s Jackson Hole Warning

Among the central bank speakers at the Kansas City Fed-sponsored Jackson Hole Symposium held through this past weekend, ECB President Draghi was the most dovish. In fact, he was arguably the most decisive one way or the other. In the central banker’s remarks, the market divined a concern that inflation would not return to target under the current programs in place and therefore the hope / fear of a Eurozone asset purchase program was fed. Therise in equities, record low government bond yields and slide in the Euro all fit this stimulus puzzle. Yet, what happens if risk trends falter in the middle of an ECB stimulus upgrade? Can the hold back the tide? Either way the Euro will hurt.

Yen Crosses: USDJPY Deviates Further from the Pack

Most of the market’s attention for the Yen crosses Monday went to USDJPY. And why wouldn’t it? The pair gapped on the open and pushed to multi-month highs stoking speculation that the beginning of the next long-term bull leg was taking shape. However, taking stock of the broader Yen crosses would note that most other pairings are straying far from USDJPY’s performance. There is a fundamental imbalance in this comparison where the dollar‘s performance is handling the bulk of this major’s move. Meanwhile, the other Yen crosses are showing a struggle for carry appetite that looks much more like the performance for global equities.

British Pound: UK Markets Have Some Catching Up to Do After the Holiday

London was closed Monday for the Summer Bank Holiday and investors subsequently missed one of the best days for the broader European equity markets in months. As long as sentiment doesn’t take a dramatic turn before the UK markets come online, there will be a significant ‘catch up’ that will be realized in the opening move of the market. However, the demand in the capital markets is unlikely to filter through to the British pound. Not only was the sterling active through the Monday session, but the currency has moved further and further away from its ‘carry’ currency designation. For event risk, the upcoming session holds the BBA home loans figures for July. Given the quick retreat in speculation for BoE rate hikes, the market will likely react more dramatically to a ‘miss’.

New Zealand Dollar Extends Tumble as Speculative Efforts Trump Data

The New Zealand dollar was easily the worst performer amongst the majors Monday – losing between 0.4 percent and 0.8 percent (versus the Euro and Pound respectively). Fundamentally, the stumble didn’t come with much of a market shove. The docket was light until this morning’s July trade balance figures – and the impact of the sharper-than-expected NZ$475 billion deficit is moderated when we consider there is a strong seasonal effect. The bearish drive behind the kiwi carries over far more from speculative interests rather than renewed fundamental concern. That said, the collapse in rate speculation may have tipped the scales towards the other extreme. With this most recent drop for the currency, neither 10-year bond yields nor swaps are showing further loss in rate forecasts.

Emerging Markets Capital Benchmarks Advance but Currencies Fold to USD

Following the lead of most other equity indexes around the world, the MSCI Emerging Market ETF jumped 0.8 percent this past session – enough to wipe out last week’s losses but not to forge a new bull trend beyond the three-year highs that reside immediately above the market. A rising tide lifts all boats, but the capital market climb didn’t’ seem to extend to the FX market. Virtually all of the EM currencies – major powerhouses to small speculative crosses – lost ground to the dollar Monday. Of note, despite the bombastic headlines suggesting tensions between Russia and the West were flaring up; the Ruble was only 0.2 percent lower to start the week. Ahead, Russian and Ukrainian leaders are scheduled to meet. Elsehwere, South Africa will release its 2Q GDP figures at 9:30 GMT.

Gold Breakout Approaching with Market in a Technically Volatile Position

Activity levels in the gold market (measured through the Average True Range) are fading quickly. This drain in trading mirrors other participation and conviction measures. Volume for futures and ETFs has floundered once again. The swell in net long futures speculative interest from the COT was checked back before reaching a 20-month high once again this past week. Meanwhile, the aggregate open interest in gold futures is close to sinking below the five year low set earlier this month. Some measures of market involvement reflect the longer term views of the market, but the short-term volatility levels is where metals traders should be focusing. An extreme in activity is far more quickly reconciled than an extreme in price trend. That is a particularly taxing position given gold is at the floor of its 2014 rising trendline support.

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Conference Board China July Leading Economic Index (JUL)

Index has shown strong growth in 2Q this year