There’s never a dull moment in the Foggy Bottom these days as the market’s conviction was dented overnight by uncertain monetary policy and the constant stream of US Special Prosecutor Mueller’s Russia-Gate headlines which explain the overnight dollar swoon. Special Counsel Mueller has reportedly empanelled a grand jury to investigate Russia’s alleged interference in the 2016 national elections. The grand jury is a sign that the investigation is growing in intensity over the Trump campaign’s possible collusion with Russia. Another toxic elixir for the greenback is brewing.
The Old Lady of Threadneedle Street (Bank of England) kept policy on hold by a 6-2 vote, but the BOE statement views were very balanced and a complete departure from recent hawkish overtones that some MPC members have been expressing. On cue, the pound tanked 100 pips on the initial decision with EUR/GBP ripping higher through the .90, levels we have not seen since November 2016. With the BOE 2017 rate hike window likely nailed shut we should expect GBP to underperform G-10 particularly against the crosses. (EUR/GBP and GBP/AUD)
The US 10 year yield dipped on the BOE dovish tones which now has currency markets shifting their view to a similar dovish tack by the Federal Reserve Boards due to the incessant political fracas in Washington. US yields remained heavy all NY session weighing on the greenback which received little help from economic data when US Non-manufacturing business grew slower than expected in July. Markets continue to re-evaluate the likely impact of Fed policy in the wake of the political headlines and soft US data. The 10-year yield dropped five bps to 2.22%, while 30-year yield lost six bps, reaching 2.79%.
However, it was the Trump Russia-Gate headlines in late NY that has seen the psychologically key 110 level taken out in USD/JPY. The Russia headlines are coming out fast and furious sending a shiver down investors' spines. Where there is smoke, there may be fire so look for headlines risk to be front and centre as this inquisition expands.
And of course, we have the NFP later today as the all-important wage data will come under the markets' glare. Crystal ball assumptions aside, one thing current price action is suggesting, this month’s headline is unlikely to affect current market Fed view and that only much keener than expected rise in hourly earnings could provide any support to the beleaguered buck. Given the elusiveness of wage growth in the current economic climate, a top side beat is highly unlikely. Even in an unlikely USD dollar rally post-NFP scenario, traders will be more inclined to fade dollar strength so look for any dollar rallies to be sold.
Blue chips continue to hit the higher ground, with the Dow posting a new all-time high again at 22,040 before trading lower towards day end. Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) both lost nearly 1%, putting the most pressure on the S&P.
Euro
The euro is doing what the euro has been doing for the past month, a buy in the dip but on an eventual clean break of 1.1900, we are likely in for some serious profit taking ahead of the magnetic 1.200 levels. The reason is the Draghi risk as he is speaking at Jackson Hole later this month. While President Draghi did not sound any alarm bell about the euro's surge after last month’s ECB, there are some concerns that the speed of the euro rise will trigger a Jackson Hole response for the ECB president.
Japanese Yen
Abe’s cabinet reshuffle overnight came and went without much ado but the US political headline risk, which is again rearing its ugly head, has sent a tremor across all asset classes as the USD/JPY tracks in risk averse mode. We had been basing just below 110 in recent days so that the 109.75-85 area will be critical. However, with NFP later today it’s unlikely we’ll see any aggressive dollar moves until after the US jobs print.
Australian Dollar
The Australian dollar traded heavy overnight only to get a reprieve from the general USD malaise. The focus will now be on Retail Sales and the RBA’s Quarterly Monetary Policy report later this morning.
Overnight RBA Harper told the Wall Street Journal that AUD strength was due to a disarticulate USD:
“The real economy in the U.S. is staging a quite remarkable recovery. You would expect that would lead to a stronger U.S. dollar.”