Dollar Picks Up Steam, Divergences Seen

Divergences are beginning to appear in the forex market with the U.S. dollar extending its gains versus some currencies and losing traction against others. More specifically while EUR/USD and GBP/USD continued to fall, USD/JPY, AUD/USD and NZD/USD marched higher. Investors are not taking Fed Vice Chair Stanley Fischer's comments about a September rate hike seriously as we can see through the decline in Treasury yields and rise in stocks today. If investors believed in the serious risk of two rate hikes this year, yields would be up and stocks would be down.  Fed fund futures are only pricing a 36% chance of a September hike and a 61% chance of the next rate hike coming in December.  Janet Yellen and Stanley Fischer may have made their hawkish bias very clear at Jackson Hole but market participants are waiting for evidence that a rate hike is warranted.  Today's healthy personal income and spending depending numbers failed to do the trick and there's no doubt that everyone is waiting for Friday's non-farm payrolls report.  While an abysmally weak number would validate the market's skepticism, unless payrolls rises by less than 125K, the Fed may still back 2016 tightening. With this in mind, we like buying dollars on dips and if USD/JPY pulls back to 101.25-101.50 region it would be a great level to establish fresh longs.  Japanese stocks soared following Friday's yen sell-off but according to Bank of Japan Kuroda who spoke last night, there is still scope for additional accommodation and they will "act without hesitation."  U.S. consumer confidence numbers are scheduled for release on Tuesday and given the rise in the University of Michigan consumer sentiment index, we are looking for a dollar positive release.

There were no Eurozone economic reports released today but that changes tomorrow with German inflation and Eurozone confidence numbers scheduled for release.  Although German consumer confidence ticked higher according to GfK, business confidence weakened.  Inflation also remains extremely low, explaining the dovish comments made by ECB member Coeure over the weekend.  He said the ECB is still some ways from achieving their target and they "may have to dive deeper" if other programs lag as they are committed to fulfilling their price stability mandate. These words stand in sharp comparison to those made by U.S. policymakers who believe they are close to achieving their own targets. Of course not everyone wants rates to stay low forever. German Finance Minister Schaeuble doesn't see low rates as favorable. While EUR/USD bounced off its lows towards the end of the NY session, we continue to look for a move down to at least 1.1125 and view any rally above 1.1200 as an attractive area to sell at a higher level. 

Sterling also ended the day off its lows. U.K. markets were closed for holiday so no economic reports were released. We heard from Bank of England monetary policy committee member Shafik over the weekend.  He didn't say much outside of indicating that the central bank is aware of the proximity to lower bound when they cut rates. This suggests they won't be as aggressive as their peers particularly since the impact of Brexit has been limited for now.  The key release for the U.K. this week is manufacturing PMI but we also have our eyes on Prime Minister May's Cabinet Meetingon Wednesday.

The Australian Dollar and New Zealand dollars ended the day higher versus the greenback, flashing signs of bottoms in the process. These two currencies have been very strong despite mixed economic data.  The only explanation is their generous yield and the lack of excessively dovish comments from the RBA and RBNZ. AUD shrugged off disappointing housing numbers. HIA New Home Sales came in at -9.7% vs. 8.2% previous. No economic reports were released from New Zealand but building permits are due this evening.   

Of the 3 commodity currencies, the Canadian Dollar was the sole loser of the day. USDCAD pair moved above the 1.30 mark for the first time in the last 12 trading days. Oil prices help to drag the Loonie lower as hopes of a production freeze fade. Iran stated that it would only cooperate with a production freeze if other oil exporters recognized Iran's right to regain market share. Iraqi Prime Minister Haidar Al-Abadi reached an agreement with KRG Premier Nechirvan Barzani during a meeting in Baghdad to start "technical talks" between the federal oil ministry and the KRG Ministry of Natural Resources. According to a report from Bloomberg, Saad Al-Hadithi, spokesman for Al-Abadi, said that Iraq's prime minister stressed the necessity to boost oil output.  Oil remains an important driver for CAD but Canada also reports its current account balance numbers tomorrow followed by GDP numbers later this week.