Dollar Looks to Yellen to Turn Volatility into Trend, Will She Acquiesce?
Fundamental Forecast for Dollar:Neutral
- In contrast to many other financial market benchmarks’ grind to inaction, the Dollar has maintained a high volatility
- Top event risk this week includes housing and trade data, details on 2Q GDP conditions and Yellen’s comments at Jackson Hole
- See our 3Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page
Indecision is a universal market theme. And, the Dollar has not escaped the sedation. A confluence of conviction and participation is proving exceptionally difficult to muster due to the growing sense of skepticism in fundamental value as well as the seasonal lull that we expect through the ‘Summer doldrums’. Eventually this quiet will end – either as market participants naturally return to their desks after holiday or through an inevitable eruption in complacency. But what are the changes of this happening through the coming week?
Seasonal inactivity has added a further burden to an already encumbered market. Historically, August is the ‘quietest’ month for the S&P 500 – what I consider a good proxy for the ‘market’ given its prevalence and familiarity. Volume through the month of August is historically the lowest of the year with the exception of the shortened February or holiday-loaded December. That said, the VIX volatility index (increasingly a necessary go-to for traders in any market) has also seen a significant climb in the three months starting with August. Just as a traditional ‘risk asset’ would be beholden to these conditions, the Greenback is similarly bound to the tide whether through focus on the Fed rate forecast, its position as a safe haven or from the indirect influence from its more beset major counterparts.
It is unlikely that volume rises universally over the coming week. The seasonal replenishment does not typically occur at this time, and it has proven exceptionally difficult to motivate the masses to rush back to the market in response to a single catalyst or theme. A cap on participation means a cap on the conviction that is necessary for trend development for a currency at the center of so many crucial themes. That said, volatility will likely remain elevated and opportunity found in the application of appropriate strategy.
While the equity-based VIX volatility index has hit extreme lows – consistently below the 12 ‘vol’ mark – and the S&P 500 carves out one of its smallest ranges relative to its elevated price on record, activity in the FX market has maintained a relative premium. The general FX VIX is still double the level it plunged during the exceptionally quiet period through the summer of 2014. Volatility for the Dollar in particular is even higher. This is due in large part to the amplitude in speculation associated with diverging and competitive monetary policy efforts around the world. The Fed’s position in particularly unique as it is one of the few major policy groups that actually maintains a hawkish bias.
While the market is only pricing in a 50-50 chance that the Fed will hike rates this year; the contrast to the desperate and persistent stimulus programs form the ECB, BoJ and BoE raise the US currency’s profile. This past week in fact, we saw a remarkable series of volatile days for the USDollar founded on changing tides in speculation for Fed timing based on the rhetoric of FOMC members and a few key pieces of data. It is worth noting, however, that the currency’s reaction didn’t hang on every word spoken by the central bankers. Many times volatility would follow the course of skepticism after a member (Dudley, Williams, Bullard) attempted to crack the market’s skepticism of hikes in 2016.
With this focus and skepticism in mind, the coming week’s Jackson Hole Symposium will carry significant weight. The meeting of central bankers, economists and business leaders from around the world has generated traction in the past. On Friday, Fed Chairwoman Janet Yellen is scheduled to speak, and Dollar traders will look to her break the impasse between FOMC party line and market skepticism. However, she has shown time and again that she is not interested in generating volatility and giving traders clarity.
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