Short Dollar Squeeze continues

Tempered North Korean rhetoric a hawkish Fed Dudley and a resurgent US consumer has provided an undercurrent of dollar positivity and a subtle squeeze on dollar shorts.

Never underestimate the spending power of the US consumer as American’s open their wallets with a positive start to Q 3 contributing to a higher retail sales headline strength and core retail sales prints, with 10 of 13 sub categories improving on the month.

Japanese Yen

USDJPY was the stand out benefactor of the de-escalation of North  Korean rhetoric as haven hedges unwound and newly minted dollar longs were established on a hawkish shift in Fed language amid a backdrop of firming risk appetite. But given that the US and South Korea have military drills scheduled for next week, which could ratchet up the disruptive rhetoric, traders may wait for the dust to further settle before over committing to the current move. Nonetheless, the chart does look tempting given the last couple of ventures into the 108 handle resulted in aggressive retracement rallies back above 114 level.

Euro
EURUSD was not immune to the resurgent greenback but perhaps fell prey to low liquidity due to Assumption Day holiday in Europe.Also, there may be some concern that the ECB may lean against the current speed of the Euro appreciation in this Thursday’s ECB  minutes. But given the market has widely tipped their hand to the long EURO trade, it’s a matter of where if not when to buy the dip. I suspect the short lived peak below 1.1700 answered that question, at least for the time being.

Australian Dollar

AUDUSD continues to struggle on the resurgent USD narrative. Yesterday’s  RBA minutes created a lot bluster on the rates front. But the reality is the Aussie economy continues to sputter along, and weak wage growth and the high level of debt will continue to act as a drag.

Any misguided talk of a rate hike sooner than later for the sake of financial stability should be discounted when in fact there was no trade to be gleaned from the RBA  minutes.

Traders continue to sell into commodity currency rallies, and AUD is a preferred short given sagging base metals prices. China’s move to deleverage does not bode well  over the long term for hard commodity prices

Next up are the local jobs numbers, and given the employment data has been strong in recent months any weakness will be viewed as new intelligence and pounced on by traders.