Gold and USDJPY on the Brink

The week ahead builds towards Yellen's Jackson Hole speech ( 5 hours before Draghi's speech) in what looks like a vital event for the dollar. CAD was the top performer last week, while the pound lagged. CFTC positioning data showed less enthusiasm for USD shorts. We turn to US Treasury Secretary Mnuchin's speech  on tax reform and Trump's speech on Afghanistan at 9 pm Eastern. The USDJPY Premium short was closed for 185-pip gain. 

Click To Enlarge

From time to time there is a synchronicity in related charts that makes intermarket analysis so effective. This is one of those times.

A look at USD/JPY, gold and 10-year Treasuries shows that the trio are all flirting with major breakouts/breakdowns. USD/JPY briefly fell below the June low of 108.69 on Friday before recovering after Bannon left the White House. The bigger level is the April low of 108.13 and a break would signal a full retracement of the post-election gains.

In the bigger picture, the dollar's path depends on growth, a coherent administration and the ability to deliver on election promises like tax cuts. Bannon himself said his ouster signals a more-traditional Republican administration and that's something the market may like.

The other major front is Fed policy and the global deflationary trend. Gold and bond yields are screaming that a rate hike cycle isn't needed. So far, Yellen has leaned against the market but we will be looking for signs of a shift at Jackson Hole on Friday. The likelihood is that she sticks to the script or defers to talk about regulation (the topic of her speech is financial stability). In any case, the trio of USD/JPY, gold and 10-year yields will tell the tale.

Commitments of Traders

EUR +79K vs +94K prior JPY -77K vs -96K prior GBP -32K vs -25K prior CHF -1K vs -1K prior AUD +51K vs +58K prior CAD +51K vs +63K prior NZD +25K vs +33K prior

The general theme was that US dollar shorts were trimmed. What's striking is how quickly the positions shifted, especially EUR/USD, despite a very modest move higher in the US dollar in that period. It indicates that the dollar longs are always waiting in the weeds, ready to bounce.

The other theme was the cut in yen shorts once again. That has been a pain trade and April's dip to a four-month low in USD/JPY argues that more pain could be on the way.