Dollar Squeeze Remains Intact

The initial reaction by investors to Janet Yellen’s speech at Jackson Hole was one of elation, however, the euphoria has been short lived, as markets now adjust to a more “hawkish” FED – equities down, dollar up and treasury yields rallying.

The timing of the U.S’s first-rate hike is always going to be an issue, but the September meet is now very much in the crosshairs after Jackson Hole.

Aiding the ‘big’ dollars stellar performance overnight has been the rhetoric from other central bankers at Jackson Hole. The Bank of Japan’s (BoJ) Governor Kuroda reiterated that there is ample space for additional policy easing in order to achieve inflation target – this has pushed yen to new two month lows outright, while the ECB’s Coeure praised ECB’s negative rates and asset purchases as being “very effective” in supporting growth and inflation.

With all the major central banks back on line next month should make for an interesting time in capital markets.

This week there are a number of key releases that’s expected to keep markets occupied. Among them, Japan posts July data including unemployment, household spending, retail sales and industrial production.

In Asia, Europe and the U.S. final manufacturing PMI’s for August will be reported.

Topping it all off will be Friday’s granddaddy of U.S indicators – non-farm payrolls (NFP) – which will be key for the timing of the Fed’s monetary policy decision.

1. Stocks retreat as investors look at U.S monetary policy

Global bourses see mixed results amid growing conviction that the Fed is about raise short-term interest rates later this year. To date, “ultra loose” monetary policy has made equities very attractive for investors.

The Stoxx Europe 600 is down -0.6% in early trading, following losses in Hong Kong’s Hang Seng down -0.4% and Australia’s S&P ASX 200 down -0.8%. Markets in the U.K. are closed for a holiday.

The one exception to the rule has been in Japan. The Nikkei Stock Average rose +2.3%, as a weaker yen tends to help exporters (automakers and electronics) while shares elsewhere in Asia fell.

U.S futures point to a +0.1% opening loss for the S&P 500, following Wall Street’s worst week since the end of June.

Indices: Stoxx50 -0.5% at 2,994, FTSE closed for Bank Holiday, DAX -0.6% at 10,522, CAC-40 -0.6% at 4,417, IBEX-35 -0.9% at 8,585, FTSE MIB -1.41% at 16,607, SMI -0.3% at 8,145, S&P 500 Futures -0.1%

2. Commodities feel the pressure

With the dollar on the rise, prices for dollar-denominated commodities remain under pressure ahead of the handover to the U.S session.

Currently, crude prices are down -1% also pressured by reports that Iraq’s production rose and as Iran said it would only cooperate in talks to freeze output if fellow exporters recognized its right to fully regain market share.

Brent crude (Oct) is trading at +$49.22 per barrel, down -70c, or -1.4% from their previous close. U.S. West Texas Intermediate (WTI) crude is down -75c, or -1.6%, at +$46.89 a barrel. From their peak prices have fallen by almost -4% this month.

Gold is trading atop of its four-week low (+$1,320) this morning as concerns over the possibility of an interest-rate increase by the Fed is pressuring the weaker ‘long’ positions to close out their bets on the precious metal.

3. Odds for a September Fed tighten

Looking at the front end of the U.S yield curve, fed fund futures suggests that investors are turning more hawkish after Ms. Yellen’s comments at Jackson Hole, stating that case for a rate hike has strengthened in recent months as U.S economy was nearing employment and inflation targets. Being even more ‘hawkish’ was Fed Vice Chair Fischer emphasizing that the Fed remained data dependent and thus a “rate hike or hikes” is possible this year.

Currently, futures prices indicate that there is a +33% chance that U.S policy makers will tighten at the September 20-21st meeting. That is double what it was two weeks ago, and up from a zero possibility after the U.K. voted to exit the E.U in June.

The chance U.S. policy makers will raise rates by year-end is +57%, up from +36% at the end of July.

4. Dollar dominates overnight proceedings

The ‘mighty buck’ continues to garner support on the back of comments last week by various U.S. Fed policy makers signalling that a near-term rate increase remains very much a possibility.

Expect the markets to place enormous emphasis on this Friday’s U.S. jobs data for their vindication on rate hike timing.

In overnight trading, the dollar has gained against both perceived haven currencies and riskier ones, with USD/JPY up +0.4% at ¥102.21, and EUR/USD down -0.1% at €1.1189. The pound trades down -0.2% at £1.3102 and the Aussie down -0.1% at A$0.7555.

The markets problem trade remains the “long” Yen positions. Ahead of last Friday’s Jackson Hole meeting, U.S CFTC data indicated that speculators took their bullish bets on the yen rally to nearly three times the number of their bearish wagers. The yen fall from grace in overnight trading could force some of these weaker “long” yen positions to capitulate.

5. Yen ‘longs’ get no support from Kuroda

Over the weekend, Bank of Japan’s (BoJ) Governor Kuroda said that they will take additional monetary easing measures “without hesitation” to achieve its inflation target. The Governor indicated that there is “ample space for additional easing is available” and hence why fixed income markets expects the BoJ to take action at their September 20 meeting.

With inflation targets a topic of debate amongst the major central banks, Kuroda indicated that the BoJ does not intend to shift its +2% inflation target, either lower or higher, echoing Yellen’s Fed comments.

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