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The US dollar remains mostly within the ranges seen yesterday against the major currencies. The market awaits fresh trading incentives and the end of the summer lull, which is expected next week. The Jackson Hole Fed gathering at which Yellen speaks tomorrow is seen as the highlight of this quiet week.
Former Minneapolis Fed President Kocherlakota, and now a professor at the University of Rochester used this Great Graphic in a recent Bloomberg column.
Kocherlakota was a dove when he was at the Fed and remains dovish. He is concerned that the US economic performance is, as he says, not what it seems. By this, he means it is weaker than the GDP figures suggest. He acknowledges the US has grown faster than the other high-income economies. He dismisses it because the US population has also grown faster, but the participation rate has not.
The US dollar is going nowhere fast. It is narrowly mixed against the major currencies. The market waits for fresh trading incentives, with much hope placed on Yellen's presentation at Jackson Hole at the end of the week. Is it too early to suggest that the build-up ahead of it is too much?
The US dollar is mostly little changed against the majors, as befits a summer session. There are two exceptions.
The first is the New Zealand dollar. Comments by the central bank's governor played down the need for urgent monetary action and suggested that the bottom of cycle may be near 1.75% for the cash rate, which currently sits at 2.0%. This means that a cut next month is unlikely. November appears to be a more likely timeframe.
The US dollar has fallen against all the major currencies this month. Even the pound has gained about 0.3% against the heavy greenback.
What is most striking about the dollar's decline is that is has taken place despite a modest upgrade of the odds of a Fed hike. Consider on the broadest level, the Dow Jones polls that found 71% expect a rate hike before the end of the year compared with about 50% in the July survey.
Last week, some market participants were giving more credence to what seemed like dovish FOMC minutes than to NY Fed President Dudley's remarks that accused investors of complacency over the outlook for rates. Yesterday, Vice-Chairman of the Federal Reserve Fischer seemed to echo Dudley's sentiment, and this has underpinned the dollar and is the major spur of today's price action.
EM ended last week on a soft note. Fed tightening expectations were buffeted first by hawkish Dudley comments and then by the more balanced FOMC minutes.
On net, the markets adjusted the odds for tightening by year-end a little higher from the previous week, and stand at the highest odds since the Brexit vote. Yet despite the strong jobs data in June and July, odds of a move on September 21 or November 2 are still low, with the December 14 meeting seen as the most likely for the next hike.
The US dollar lost ground against nearly all the major currencies last week. The sole exceptions were the Australian dollar, where pressure ahead of the weekend following Moody's decision to cut the outlook for five Australian banks wiped out the previous small gain, and the Norwegian krone, which was really flat with less than a 0.1% loss.
Summer doldrums continue to depress speculative activity in the currency futures market. In the CFTC Commitment of Traders reporting week ending August 16 speculators made small adjustments to gross currency positions. There was only one change more than 6k contracts.
The Aussie bulls added 9.4k contracts to their gross long position, lifting it to 68.9k contracts. Of the other 15 gross positions we track, there were only two others above 5k contract
The US dollar is trading firmly ahead of the weekend as part of this week's losses are recouped. The gains are sufficient to put it higher for the week against the Australian dollar. If its gains against the Aussie were sustained, it would be only the second weekly gain since the end of May.
Although the news stream is light, the Aussie has been undermined by the one of the few developments today. Moody's cut the outlook for five Australian banks from steady to negative, setting the stage for likely rating cuts in the coming months.
All that is solid is melting. After Copernicus, we know that earth is not the center of Creation. Darwin showed us that humans are part of the animal kingdom. Freud told us we are not even masters of our own house.
It is not a good day for the US dollar. It is being sold across the board. The seemingly dovish FOMC minutes released late yesterday appears to have gotten the ball rolling. The takeaway for many was that any officials wanted more time to assess the data at the July meeting.