Will Dollar Rally Into Jackson Hole?

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Market Drivers August 21, 2017
More noise from NK
USDJPY back below 109.00
Nikkei -0.40% Dax -0.47%
Oil $48/bbl
Gold $1287/oz.

Europe and Asia:
JPY All Industries 0.4% vs. 0.5%

North America:
No Data

It’s been a very quiet open to the week in the FX market today with no economic data to drive trade and only a smattering of geo-political news to stoke some mild risk aversion flows in USDJPY.

North Korea once again made some noise, objecting to the annual joint military exercises between South Korea and US but in the wake of last weeks capitulation on its threat to bomb Guam, the rhetoric sounded more like bluster rather than a real risk. Nevertheless, Kim Jong Un warned of a “merciless strike” following “reckless behavior driving the situation into the uncontrollable phase of a nuclear war.”

The typical hyperbolic verbiage may have contributed to a sell off in USDJPY which took the pair below the 109.00 figure in late Asian session trade, but it found buyers at that level and snapped back above the 109.00 handle by morning European dealing. After testing support at 108.50 three times over the past month USDJPY appears to have found a base at this level and the key question this week will be whether the dollar can stage any sort of counter trend rally ahead of Jackson Hole symposium this week.

The calendar this week is very light on economic data across the G-11 spectrum with many trading desks sparsely manned as both Europeans and North Americans enjoy the last week of summer before business begins in earnest in September. The Jackson Hole symposium which will take place Thursday and Friday is, therefore, shaping up to be the main event risk of the week as markets seeks some direction from monetary policy officials.

The ECB has already stated that President Draghi will not reveal any new policy paths, indicating that any official communication on taper will not come until October at least. Although the ECB always notes that it does not follow the exchange rate fluctuations, European monetary authorities no doubt are becoming concerned with the recent strength of the EURUSD and did not want to provide an excuse for the pair to rally through the key 1.2000 level this week. Indeed the unit lost much of it forward momentum after the ECB has made that announcement and remains capped at the 1.1800 level for now.

With Steve Bannon gone from the White House and President Trump returning back to work, the focus in Washington DC may shift back to tax reform which would be dollar positive if the Trump administration made a concerted effort to focus on economic rather than political matters. Still, the dangers of further geopolitical stresses have not disappeared completely. While North Korea conflict may have moved to the back burner, the Trump Administration plans to make a major policy announcement on Afghanistan tonight. If the news centers on a massive new surge in resources and personnel the dollar could sell off once more on fears of a fresh US military adventure without much promise of success.

For now, all of the positive US economic news has been offset by the political follies of the Trump administration and buck is unlikely to stage much of a comeback unless the tone from Washington becomes decidedly more disciplined.

Boris Schlossberg
Managing Director

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