Is Yellen Causing Carry Back?

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Market Drivers June 22, 2016

Dollar slightly weaker
High yielders rally
Nikkei -0.54% Dax 0.57%
Oil $50/bbl
Gold $1267/oz.

Europe and Asia:
AUD Westpac LEI 0.21% vs. 0.14%

North America:
CAD Retail Sales 8:30 NY
USD Yellen Testimony in House 10:00 NY
USD Existing Home Sales 10:00 NY

The dollar was slightly weaker across the board in morning European dealing in generally quiet market conditions as traders prepared to for the second day of Janet Yellen’s testimony this time in the House.

Yesterday’s proceedings produced little fresh information with Ms. Yellen reaffirming the statement from last month’s FOMC presser where she noted that risks to the economy remained in the form of slowdown in labor growth and the prospect of major market disturbance in case of Brexit.

Ms. Yellen offered no scenario under which the Fed would consider a rate hike in July, although as always she did not categorically rule out the idea. Still her reticence was palpable and it appears that the Fed will remain stationary for the rest of the year, as monetary policy makers are likely to remain on the sidelines during the heat of the US Presidential election.

One of the reasons why the dollar was not weaker yesterday was because Ms. Yellen’s dovishness was offset by Mr. Draghi’s remarks, with ECB chief noting that further stimulus was in the pipeline. Euro broke below 1.1300 and drifted all the way to 1.1236 in Asia trade, but today the pair was better bid in Europe making another run at the 1.1300 figure.

With Ms. Yellen monopolizing the global stage today, her remarks may carry more weight in the FX market especially if she once again focuses on the risks to US growth. As we noted yesterday if the ultimate result of this weeks events is that Brexit fails and the Fed still remains stationary, then the carry trade should continue to benefit from yield seeking flows. Little wonder then that both Aussie and kiwi are well bid today with the former once again looking to take out the 7500 barrier while the former could push to fresh swing highs at 7200.

If Brexit threat passes, carry trade will be back with a vengeance.

Boris Schlossberg
Managing Director

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