Big Dollar Not So Mighty

Tuesday August 23: Five things the markets are talking about

With investors reluctant to place large directional bets ahead of the Jackson Hole address by Fed chair Yellen this Friday has asset price moves remaining somewhat contained.

Despite this, the ‘mighty’ dollar is beginning to look a tad sicklier ahead of this morning’s U.S open.

With the lack of investor conviction on the timing of the Fed’s next rate hike has the DXY failing to break back into a positive trend channel formed in June. Currently, the index languishes atop of key support levels (94.00) and is looking to add to last weeks -1.3% loss.

Don’t be surprised, that with the lack of market interest, combined with some current historic currency short positioning, GBP in particular, could see a healthy dollar ‘negative’ turnover before Ms. Yellen’s speech, especially if weak dollar ‘long’s’ capitulate.

1. Euro bourses get the green light

Mixed post-Brexit Euro data has equity indices trading higher. This morning’s Euro’s PMIs do confirm that the eurozone’s economic recovery gained speed this month, despite the U.K.’s decision to leave the E.U.

In particular, the French PMI print showed their private sector growing at its fastest pace in ten-months. Elsewhere, in Denmark, consumer confidence jumped, while Germany’s own PMI reading points toward growth.

Financial stocks are leading the gains in the Eurostoxx, while homebuilders and construction stocks are leading the gains in the FTSE 100. Interestingly, commodity and mining sector are also trading notably higher despite WTI and Brent giving back some of its recent gains.

Futures markets points to higher open in Wall Street after having ended little changed on Monday.

Indices: Stoxx50 +1.0% at 2,986, FTSE +0.5% at 6,863, DAX +0.7% at 10,572, CAC-40 +0.7% at 4,149, IBEX-35 +0.8% at 8,536, FTSE MIB +1.1% at 16,552, SMI +0.4% at 8,189, S&P 500 Futures +0.2%

2. Crude prices continue to “roll over”

Oil prices remain under pressure this morning after shedding -3% yesterday amid worries about growing Chinese fuel exports, more Iraqi and Nigerian crude shipments and a rising U.S. oil rig count.

Brent crude has lost -25c to trade +$48.96 a barrel, while West Texas is down -36c to +$47.07.

Also not aiding energy prices is a cautious Goldman Sacs report maintaining its +$45-50 a barrel target for Brent Crude through next summer.

With investors preferring to wait for more clues from the Fed, gold (+$1,343) is mostly unchanged after hitting its two-week low yesterday.

3. U.S yields remain capped by foreign interest

Nevertheless, a small percentage of the market does seem to be reluctantly acknowledging that a 2016 rate hike is still quite probable and that September is a ‘live” FOMC meeting.

Fed fund futures are moving, they currently imply around a +24% chance of a rate hike in September (yesterday was +18%), rising to around +50% by December.

Note: a quarter-point hike is not fully priced in until September 2017.

The yield on the benchmark 10-year U.S. Treasury note is +1.562% compared with +1.541% yesterday. EM investors continue to take advantage of price dips to buy more Treasuries – U.S 10’s climbed as high as +1.6% late Sunday night.

4. Reserve Bank of New Zealand (RBNZ) surrenders

Antipodean currencies continue to soar, despite the efforts of the respective central banks to talk their currencies down. Investors require yield, hence the support for both the Aussie and Kiwi.

Is the Reserve Bank of New Zealand (RBNZ) admitting defeat?

In overnight trading, the NZD was one of the bigger movers, climbing +0.8% to a new 2016 high of NZ$0.7325.

The RBA posted on its website a speech by Governor Wheeler suggesting that the central bank won’t cut rates beyond the 35 basis points already presented in its recent monetary statement. The Governor indicated that the current rate track balances risks with their inflation objectives, and suggest that “too rapid of an easing would produce an unsustainable growth.”

Naturally, the Kiwi spiked up on the comments as fixed income dealers price in a “one-and-done” approach rather than the touted “two-more rate cuts by the first-half of next year.”

5. “Big Dollar” loses more ground

The buck is not that “mighty” in this morning’s Euro/U.S handover. The dollar continues to lose ground as investors focus on Yellen’s speech at Jackson Hole on Friday. The majority are now betting that her comments will still leave a near-term rate hike looking unlikely.

Fed Vice-Chairman Fischer’s latest remarks on the weekend – that the Fed intends to raise interest rates in the coming months – has fallen on deaf ears. The obvious event risk this weekend is that Ms. Yellen happens to be more bullish in her remarks.

EUR/USD trades up +0.1% at €1.1326; USD/JPY is down -0.1% at ¥100.20. GBP/USD is up +0.4% at £1.3181. Commodity-linked currencies, such as CAD and AUD, gain versus the USD, while EM currencies are also on the rise with USD/ZAR and USD/MXN down -0.3% and -0.2% respectively.

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