Intraday Market Thoughts Archives

The US dollar rally started on about July 10 and since then has gained at least 2.3% against every major currency except one – the Australian dollar. AUD/USD is still down 1.1% in that period but the relative resilience of the Aussie says something about underlying demand.  As the NZ dollar extends losses across the board and breaks below a key trend line, our AUDNZD long pusjes further into the green. There are currently 10 Premium trades in progress, 6 of which in profit, 1 flat and 3 are in a loss. All details are in the Premium Insights.

The reason that betting on the second best performer in a trend is that the hot money tends to flood into the leader. In this case it's the US dollar and on some metrics that move is beginning to look overdone. When the inevitable correction comes, second best is the safe place to be.

On Wednesday, the US dollar continued to outperform following the FOMC minutes. The knee jerk came on headlines that said “many” Fed officials said job gains could bring a sooner rate rise. The market generally moves on the headlines and looks deeper later. The actual text was more nuanced saying that “if” progress toward objectives was quick “it might” be appropriate to hike sooner.

In any case, the market voted for the US dollar, sending USD/JPY to 103.85 (near the April high) while the euro and cable continued to trace out cycle lows.

We argued for US dollar strength early in the week but the market will now laser in on Yellen's speech and the dollar bulls sitting on profits are likely to head to the exits.

AUD/USD is one spot a retracement could materialize but in the short-term the risks come with the HSBC China PMI at 0145 GMT.

Barring a surprise from the 51.5 consensus there's a base in the Australian dollar that could last. Stevens' comments yesterday basically ruled out a rate cut and removed the threat of intervention. If risk assets continue to rise the carry trade could also give the Aussie a lift.

It wasn't the CPI report that gave the dollar a lift on Tuesday but rather a strong housing starts report. EUR/USD and GBP/USD both fell to longer-term lows and USD/JPY is near the July high. The next event to watch is an appearance from RBA Governor Stevens.  As we move towards this evening's Aussie events,  EURAUD sustains its 3rd consecutive quarterly decline, which is the longest losing streak in 4 years. Since we opened two Premium shorts in EURAUD more than 4 weeks ago, a net of 180-pips has accumulated in both trades. The key with these trades is not only determining the correct direction, but also managing stops carefully. Full details of these trades and today's charts are found in the Premium Insights.

We wrote yesterday about the lack of enthusiasm for Yellen's speech and overall complacency on the Fed. An overwhelming consensus of analysts sees nothing but endless calls for patience and slow steps to raising rates. The consensus is so clearly dovish that we argued there is little risk in betting on a more hawkish stance and stronger dollar.

That's part of what happened on Tuesday as the US dollar broke out of a recent period of consolidation against the euro and continued to punish the pound following 7 weeks of declines in cable. The next shoe to drop could be USD/JPY as it flirts with 103.00.

All eyes were on the CPI report heading into the session but prices rose 2.0% y/y as expected and other measures were also in-line. Instead the market shifted focus to a strong housing starts which rose to 1063K compared to 969K expected. That gave traders a reason to buy the dollars and technical breaks accelerated the moves into one of the better days for the US dollar in months.

On Wednesday the market will turn to the FOMC minutes but the focus in the coming hours shifts to Australia where Stevens appears in the House of Representatives for his semi-annual grilling at 2330 GMT. It should be fairly easy for him to commit to a wait-and-see approach but he's an off-the-cuff sort of leader so be ready for anything.

The other main event is at 2350 GMT when Japan releases trade data for July.

The theme at the start of the summer was fear about Yellen growing more hawkish but with the days beginning to shorten the mood has quickly shifted. On Monday, the pound was the top performer while the Swiss franc lagged on upbeat risk appetite.   We bring back AUDNZD to the Premium signals. Nearing 8–month highs, AUDNZD may be reaching another top as RBA Governor Stevens is set to speak later this week? Or, will the Aussie break on through the 1.10 ceiling as New Zealand fundamentals deteriorate? We weigh these forces against the Aussie's volatile tendencies during falling equities. This trade as well as the AUDNZD Premium trade are in order ahead of Wednesday's semi-annual testimony and the Westpac leading index. Meanwhile, our GBPUSD and GBPCAD trades remain in progress ahead of Tuesday's UK CPI. Full details of trades & charts in the Premium Insights.

The two main US events this week are the FOMC minutes and Jackson Hole but nearly no one is worried about a surprise from the Fed Chair. Reading preview after preview, a clear consensus has emerged – Yellen will continue to preach patience and downplay jobs gains.

We agree that's the most likely outcome but a strong consensus is a dangerous thing. Throughout the summer we argued that markets were underestimating Yellen's will to stay dovish but now it might be the opposite.

It's clear the Fed has begun taking baby steps toward raising rates. If Yellen maintains the tone of the FOMC statement the downside risk for the US dollar and bonds is minimal but if she's more hawkish – even if it's a misinterpretation – the upside in the dollar could be considerably more.

In the meantime, it's clear that concerns about Russia/Ukraine are fading. The headlines have less shock value despite no signs of peace. The Ukraine confirmed that 1,200 rebel fighters crossed into the country and that will surely mean more trouble while Russia has almost abandoned all pretense of neutrality.

In the hours ahead the focus will be on AUD and NZD. At 2245 GMT New Zealand's quarterly PPI numbers are out and the inflation expectation survey is out at 0300 GMT. The RBNZ signaled a wait-and-see approach but signs of inflation could get the market excited about hikes again.

For the Aussie, look to the 0030 GMT release of the RBA minutes. For more thoughts on AUD and NZD, check out Ashraf's latest Premium Insights.