Just when the USD looked like it had a chance on progress on US tax reform it all came to an abrupt Trumping! Overnight Trump threatened a government shutdown if funding for the Mexican border wall isnt included in raising the US debt ceiling. US treasuries rallied and US 10yr yields fell from 2.2% highs all the way down to 2.16% where they sit now. The low for the year is 2.1% and is not far away. The USD cant rally when yields are falling to these levels . The Yen and Eur where top of the leader board while gold also rallied and the sour sentiment took Vix higher and equities lower.
Any hope for the USD now lies in Yellen’s hands with attention now moving to Jackson Hole starting tonight. Yellen in her Friday speech (midnite Syd time) needs to communicate in no uncertain terms that the Dec rate hike is well in play. The market pricing for a Dec rate hike has dropped to only 30% now. If she delivers some hawkishness then the market is mis-priced and scope for US yields and the USD to rally. She doesnt communicate this then the trend is your friend and the market will keep punishing the USD.
Yellen’s speech is on Financial stability. US financial conditions despite the two rate hikes this year are currently very easy. It comes into the Feds calculations when making decisions on further tightening . It gives them a green light that conditions are so easy and it should be the key takeaway from Yellens speech. So probabilities skewed that her speech is more on the hawkish side and will help the USD. That being the case lets look at where that trade can be expressed via a USD long below.
Kiwi Update: Kiwi has been the weak link in the currency space this week. Record longs starting to get washed out. Even the Trump USD selloff o/n didnt inspire any meaningful rally. The Kiwi tested critical support at 0.7200 but it was respected on first test. 0.7200 has held the market since early June and no doubt there will be stops sitting below. They will also be sitting sub the 100DMA at 0.7160 and also further south below the 200 DMA at 0.7120. If Yellen delivers Fri the Kiwi is set up for a decent spike lower and the currency to attack. Topside 0.7250/60 region has been an important pivot and where to start averaging in shorts. Above 0.7300 obviously the trade is wrong and where to put stops.