USD/JPY Trickles Higher with 40 Hours to Yellen

With 40 hours to go before Janet Yellen's testimony at Jackson Hole, the dollar has finally caught a bid. The greenback traded higher against the euro, Japanese Yen, Swiss Franc, Canadian and Australian dollars. This happened after the National Association of Realtors reported that existing home sales dropped for the first time since February. Fed fund futures hasn't changed much since the end of last week when the market was pricing in 51% chance of a rate hike by the end of the year. Currently the December contracts have the odds at 52%. For the most part the performance of the greenback has been uneven with EUR/USD falling consistently and GBPUSD rising slowly throughout the week. USD/JPY rose above 100.60 but failed to close above 100.50. The pair's consolidation has been particularly tight which could be interpreted one of two ways - either a bottom is near or the selling pressure is just too strong for USD/JPY to muster a meaningful rally. We believe that it will be the latter with USD/JPY poised for a stronger recovery that should take the pair to 102. It probably won't happen on the back of Yellen's comments but it could happen over the next few weeks as long as 99.00 holds. 

The best performing currency today was sterling, which came close to hitting 1.33. The recovery had nothing to do with data as there were fewer loans approved in the month of July. With that in mind, the British Bankers' Association reported that consumer credit rose at its strongest pace in nearly 10 years as shoppers hit the stores and took advantage of low interest rate loans. This shows that while Brexit may have hurt the housing market it hasn't had a major impact on consumption. Given how far sterling has fallen post Brexit and the amount of short positions in the market, the recent spate of good news has encouraged investors to take profits. EUR/GBP has also come a long way since peaking above 87 cents. Further losses are likely with a possible move down to 84 cents. The rally in GBP/USD on other hand is beginning to lose momentum and we would not be surprised to see a correction towards 1.3100-1.3150 before another attempt higher. 

In contrast to sterling, EUR/USD extended its losses. There were no revisions to second quarter GDP numbers but exports and imports were slightly stronger. Earlier this week we learned that manufacturing and service sector activity in the Eurozone's largest economy slowed during the month of August. This does not bode well for tomorrow's IFO report. The deterioration in growth should lead to weaker business confidence, which could translate into further losses for EUR/USD. On a technical basis, EUR/USD has broken below the 23.6% Fibonacci retracement of the 2014 to 2015 decline and is below the 100- week SMA. This signals a potential for a deeper correction but near term support comes in at the 100-day SMA near 1.1225. 

Meanwhile there was very little consistency in the performance of commodity currencies. The best performer was the New Zealand Dollar. The country reported a larger than expected trade deficit, coming in at -433m vs. -325m expected. However NZD managed to shrug off the disappointing number thanks in part to rating agency Fitch who affirmed that New Zealand bonds maturing in 2037 maintained their AA+ rating. AUD also held onto its gains despite disappointing data. Australia's Construction Work data dropped larger than expected, declining by 3.7% vs. -2.0% expected. Oil prices fell approximately 3%, keeping USD/CAD afloat for most of the day. US Crude Oil Inventories increased by 2501K vs. -850k was expected but the gains for USD/CAD were limited because the technical picture is less constructive with the currency pair still flirting with the 100-day SMA. There are no major economic reports from the 3 commodity producing countries scheduled for release on Thursday but all 3 currencies look like they could see losses.