The Yellen Fears Have Faded

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.