Yellen on Deck – USD A Wreck?

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Market Drivers June 21, 2016

Cable through 1.4700 as Bremain polls continue to lead
GE ZEW a bit better
Nikkei 1.28% Dax 0.16%
Oil $49/bbl
Gold $1284/oz.

Europe and Asia:
AUD RBA Minutes reaffirm neutral stance
GBP PSNB 9.1B vs. 9.4B
EUR ZEW 54.5 vs. 53

North America:
Yellen Testimony in House 10:00 NY

More Bremain momentum in overnight trade today as a series of polls continued to show that the in the final days before the referendum the remain side has clearly taken the upper hand with the latest ORB poll showing that it now enjoys a 7% lead on the Leave side.

The other polls continue to show more of a toss up, by the currency markets have decided that UK will vote to Remain and cable has continued to grind higher rising to 1.4768 in early London dealing as longs press their advantage.

UK and EU officials continue to issue strong words of caution, with ECB making full contingency plans for liquidity in case Leave wins and FM Osborne noting that UK stocks may be suspended for trading if Brexit becomes a reality. However, barring some sudden change in sentiment the prospect of Brexit remains remote and markets are clearly staging a relief rally ahead of the event.

On the eco front the RBA issued its monetary policy meeting minutes in which it essentially reaffirmed the neutral stance and appeared to be relatively sanguine about the economy. Although the central bank warned about the appreciating currency it appeared to be relatively unconcerned about the current exchange levels and Aussie rallied a bit in the aftermath of the release ultimately taking out the 7500 level in mid morning London trade.

Part of the reason for the rally in the high yielders tonight is the upcoming testimony of Janet Yellen at 1400 GMT. The Fed Chair will be making her semi-annual presentation in front of Congress today and tomorrow and markets anticipate a relatively dovish message from Ms. Yellen given the tone of the FOMC presser just a week ago.

Currency traders will keep a keen lookout for any suggestion that the Fed would consider a rate hike in July if Bremain passes without disturbance and if labor data rebounds. If the Fed chair refuses to give any assurances of policy normalization under those conditions then the FX markets will conclude that there will be no rate hike from the Fed until end of year and the greenback could see a stronger selloff as US yields will likely compress.

With Bremain the likely outcome and the Fed stationary, such a scenario should favor the carry trades and Aussie and kiwi could see more upside as the day progresses.

Boris Schlossberg
Managing Director

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