Dollar Snaps Back

<br /> Dollar Snaps Back – Marc to Market<br />


The US dollar is enjoying a mid-week
bounce against all the major currencies.
  It appears that participants in Asia
and Europe are giving more credence to NY Fed Dudley’s comments yesterday.
Although many in the market have given up on a rate hike this year, Dudley
reaffirmed his belief that the economy was accelerating in H2 and that the market
was being too complacent.   
participants appear confused over the talk of the structural shifts in the
economy and the lower “natural” rate or long-term equilibrium Fed
funds rate is lower that officials
previously thought (and dot plots reflect this gradual adjustment to the Fed’s
thinking) on one hand, and the cyclical policy adjustment
on the other. 
 To put it simply, just because the
terminal rate on Fed funds is considerably lower than past cycles does not mean
that the there is no scope to hike rates.    
In addition to
Dudley’s comments, there was news that US housing starts rose in July instead
of falling as many had expected.
  It was the first back-to-back
increase since March-April 2015.  It was sufficient to prompt the Atlanta
Fed to revise up its GDPNow tracker to 3.6%  due to the increase in
residential investment.  Separately, industrial output and manufacturing
were also stronger than expected.  
The focus on
the Fed continues with the minutes from the FOMC July meeting set to be published later today. 
 Tomorrow Dudley holds a press conference in NY, and
there will be a Q&A session.  Still, his comments yesterday likely
stole much of not only his thunder, but perhaps Yellen’s too when she appears
at the Jackson Hole confab later this month.  
The dollar
frayed the JPY100 support level, falling to almost JPY99.50 before bouncing
technical work suggests a convincing break of JPY100 is needed to signal a new
leg down that could carry the greenback toward JPY92.50. The dollar reached
JPY101.20 in Asia before consolidating in the European morning.  A move
above yesterday’s high (~JPY101.30) is needed to begin repairing the technical
officials are more concerned about the pace of movement rather than a specific level. 
  We think suggestions that a break of a level such as
JPY100 or JPY95 as a trigger for intervention is misguided.  A slow grind
is preferable to a sharp move.  It gives investors and businesses time to
adjust.  One-month implied volatility is near 10.6% today.  The
50-day average is near 13.1%, and the
100-day average is 12.2%.     If market conditions earlier this year
did not win over support for Japanese intervention by its G7 partners, the
recent price action will not.  
The biggest
surprise of today has been news that the UK claimant count fell in July. 
 The 8.6k decline contrasts with expectations of a
9.0k increase.  Other details are reported
with an extra month lag.  Employment in the 3-months through June rose by
172k; considerably better than the 150k
expected.  Earnings growth with and without bonuses also ticked up to 2.4%
and 2.3% respectively from 2.3% and 2.2%. 
Sterling had
eased to almost $1.2865 at start the week. 
 After holding the low yesterday, it staged an impressive recovery
back above $1.30.  It extended those gains to $1.3070 today, its highest
level since last Wednesday.  It is not clear that it can sustain the
foothold above $1.30, in the face of a the broader US dollar bounce.  Look
for it to hold above $1.2950.  
The Antipodean
currencies are the weakest performers today, and
this is despite as expected wage growth in Australia and a strong jobs report
in New Zealand.
  The Australian dollar is off nearly
0.9% and is testing a retracement objective near $0.7630.  Below there,
the next corrective target is near $0.7595, which corresponds to another
retracement target and the 20-day moving average.  It has not closed below
this moving average since July 28.  
For its part,
the euro is faring well despite the US dollar’s recovery
.  The single currency’s pullback has
been minor.  It has found support around $1.1250.  A break could see
another half cent push, but this does not seem particularly likely.  Some
think yesterday’s gain are a breakout. Specifically, the downtrend line from
the early-May highs and the late-June highs was convincingly violated yesterday
($1.1250), including on a closing basis.  The euro has held above the
trendline today.  
Elsewhere we
note that there was a lukewarm response to news that a Hong Kong-Shenzhen link
will be established by the end of the
 The Shenzhen Composite rose 0.3%,
while the Shanghai Composite was flat.  The PBOC fixed the dollar weaker
earlier today at CNY6.6056, its lowest level since June 24.  However, it
appears that the month-long dollar downtrend against the yuan may be over.
 We don’t see the dollar falling through CNY6.60 on this move.  


Dollar Snaps Back
Dollar Snaps Back

Reviewed by Marc Chandler

August 17, 2016

Rating: 5

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