Talking Points:

Dollar Rally Cools Before Janet Yellen Takes the Stage at Jackson Hole
Euro: Will Draghi Comment on the Asset Purchase Program, Currency?
British Pound Suffers 7-Week Slide – Longest in Decades

Dollar Rally Cools Before Janet Yellen Takes the Stage at Jackson Hole

After two strong days of rally, the US Dollar took a breather Thursday. This market certainly wasn’t wanting for fundamental encouragement. However, with the intensified scrutiny and market sensitivity to rate speculation as of late, Fed Chairwoman Janet Yellen’s scheduled speech Friday was reason enough for bulls to take some profit and risk off the table. For performance, the dollar eased back against most of its major counterparts this past session and the Dow Jones FXCM Dollar Index (ticker = USDollar) posted a hearty intraday reversal. Meanwhile, the S&P 500 was unencumbered by the sense of hesitation as it marched to a record high and its VIX Volatility Index slipped back below 12 – an extreme low. While a record high in this speculative barometer is presumptuous, its climb was not as dramatic as the dollar’s.

Setting the tone for what lies ahead, the US event risk was encouraging this past session. Data-wise, Markit’s manufacturing activity report for August was sharply better than expected and a series high, while existing home sales hit a 10-month high. More on pace with what traders have been keeping tabs on, the unscheduled Fed commentary the Thursday took a notably hawkish timbre. The most reserved of the three speakers, John Williams said a Summer 2015 rate hike forecast was reasonable. A known hawk, Esther George (host of the Jackson Hole Symposium as the Kansas City Fed President) stepped it up by remarking that some measures suggested rates should already be higher. Charles Plosser took it further by repeating waiting too long to remove accommodation could have “dire” consequences. Chair Yellen is unlikely to share the fervor of her colleagues, but there has been a notable shift in the broader FOMC view towards hawkishness. As the central bank’s figure head, her comments could carry far more weight – especially if hawkish.

Euro: Will Draghi Comment on the Asset Purchase Program, Currency?

The Euro wasn’t putting up a particularly strong move one way or the other this past session. Extending a theme of dampening its reaction to disappointing fundamental updates, the currency was little moved in the wake of the August PMI figures. While both Germany and France – which offered troubling 2Q GDP updates last week – showed improvement for the month, the broader Eurozone measure slipped. Similarly discouraging, the Euro-area consumer sentiment survey extended its reversal from 7-year highs. Friday, we will see whether ECB President Draghi is taking weak growth readings to heart in his speech. Will he mention the asset purchase program option or the Euro?

British Pound Suffers 7-Week Slide – Longest in Decades

Unless the British Pound can rally over 110 points against the Dollar through the final trading session of the week, GBPUSD will end the week with yet another loss. That would make 7 consecutive weeks of decline – matching (June 2005 and August 2008) the longest period of retreat in decades. For scheduled event risk through the final trading session this week, there is rather little on the docket besides a speech expected from the BoE’s Broadbent on Saturday. Yet, in the absence of high-level drivers, there is a growing potential for the sterling to regain some traction after its aggressive decline on the sharp interest rate speculation retrenchment.

Yen Crosses Bounce Venturing into Necessary Trend Area

A rebound from the Yen crosses is not particularly shocking given the rebound in global equities this past week. However, the low hanging fruit for stocks and carry pairs have been more-or-less exercised. For stocks, that is seen in the return to near-record lows in volatility measures. For the yen pairs, we have similar implied volatility readings we can defer to, but it is also just as prominent in the market’s technical bearings. Pairs like USDJPY stand on the cusp of the next leg of the bull trend from the third quarter of 2012. The question bulls must ask themselves is whether there are the conditions and will to bid carry trade to significantly higher levels. Yields and economic conditions cloud that view.

Australian and New Zealand Dollars – An End of Yield Speculation Adjustment?

The New Zealand dollar has dropped nearly 500 pips from its high and 12-month rate forecasts have dropped over 100 bps over the months. Meanwhile, the tentative advance from the Australian dollar and the local yields these past weeks has stalled. These corrections are materially different, but they lead to the same consideration: how far do rate forecasts correct, especially when these carry currencies are so far up the curve? Anecdotally this morning, demand for a three-year Aussie bond auction was the strongest in a decade.

Emerging Markets Slip Second Day, World’s Largest SWF Slows Investment

From its lowest of 2014 – set in January – the MSCI Emerging Market ETF is currently up 21 percent. Meanwhile, shares outstanding as a measure of demand is 32 percent above its own low for the year. That looks impressive until we put both into perspective. Price is still within a broader range from the past years and interest is peaking well below highs from the previous three years. Doubt is creeping in. In fact, this past session, Norway’s Sovereign Wealth Fund – the world’s largest – announced that it was slowing its investment into EM.

Gold’s Five-Day Decline Matches Longest in 9 Months

With Thursday’s 1.2 percent decline – the largest in five weeks – gold has extended a selloff to five consecutive days. This matches the worst tumble the metal has suffered since November. This is a hefty move and the event risk ahead is temptingly threatening to this alternative store of wealth and inflation hedge. What will Janet Yellen and Mario Draghi says? Can they stoke demand for the precious metal or perhaps they will draw the focus onto yields and away from gold. Volume jumped this past session, suggesting traders are readying themselves.

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