The dollar (and yen) could come back as a safe-haven

Outlook:

Tomorrow we get the Fed minutes of the last FOMC meeting and hopes are running high of a clue to any action at the September 12-13 meeting. This is silly because most of the favorable data came out after the August meeting and besides, the policy perspective will come Aug 31 at Jackson Hole—from both Bernanke and Draghi. Tomorrow Juncker goes to Athens and on Thursday Merkel and Hollande meet ahead of meetings with Samaras on Friday and Saturday, again with high hopes of some fresh news and sound-bites to justify risk appetite.

Hopes are a little silly here, too, since the real decision-maker these days is the ECB and it doesn’t meet until Sept 6, and besides, Merkel’s hands are somewhat tied by having to wait for the constitutional court (Sept 12) as well as whatever develops on the banking supervisor role for the ECB and the audit reports on the Spanish banks. What fresh news, exactly, do people expect this week? Presumably the expected news is along the lines of “rescue by central banks.” But the central banks are, understandably, growing weary of taking all the responsibility, especially in situations where they have no control—fiscal matters. It would be no surprise if officials and the central banks decline to say much ahead of Jackson Hole and the official policy meetings. And in the fickle world of FX, a shortage of hard news can easily lead to a swift euro sell-off and a resumption of the rise of the yen.

Instead, as Market News says, tomorrow’s Markit PMI’s from Europe, China and the US will be the driver. Europe’s July PMI showed 12 months of contraction and every country except Ireland had a reading under 50. The HSBC China PMI was a little higher in July than in Aug but still under 50. The Markit version for the US, not yet the benchmark but a credible entry, showed a drop in July and was only a little over the boom/bust line of 50 (51.8). If bad data leads traders to think of global recession, the dollar (and yen) could come back as a safe-haven.

The ECB’s leadership role is being taken as entirely plausible and credible. We still have the game of chicken with Spain to get past—Spain has to ask for a bailout but won’t ask until it knows the conditions—and again we could have a kick-the-can-down-the-road situation, as we had with Greece. Traders are willing to believe in ECB intervention and as long as they think so and accordingly, Spain can borrow more cheaply because of it, crisis is deferred. Many traders say the euro is capped at various previous high levels (like 1.2747 from June 18) but talk of a dive to 1.2000 and below is off the table for now.

But watch that economic data. It counts, too. If it comes in to suggest a rate cut by the ECB and an end to accommodation by the Fed, the euro could take a hit—or be supported by the idea the world is safe for risk. It’s frustrating that we don’t know which way the market may jump on that scenario—either direction is equally explainable.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	79.14	LONG USD	STRONG	08/17/12	79.47	-0 .08%
GBP/USD	1.5758	LONG GBP	WEAK	07/30/12	1.5704	0 .34%
EURO/USD	1.2404	LONG EURO	WEAK	08/07/12	1.2403	0 .01%
EURO/JPY	98.51	LONG EURO	WEAK	08/06/12	96.72	1 .85%
EURO/GBP	0.7871	LONG EURO	WEAK	08/06/12	0.7943	-0 .91%
GBP/JPY	125.14	LONG GBP	WEAK	08/16/12	124.20	0 .76%
USD/CHF	0.9680	SHORT USD	WEAK	08/07/12	0.9686	0 .06%
USD/CAD	0.9856	SHORT USD	STRONG	06/18/12	1.0229	3 .78%
AUD/USD	1.0505	LONG AUD	STRONG	06/15/12	1.0037	4 .66%
AUD/JPY	83.41	LONG AUD	WEAK	07/30/12	82.06	1 .65%
USD/MXN	13.0770	SHORT USD	WEAK	07/30/12	13.2485	1 .31%