Strong dollar rebound coming - RBS

Research Team at RBS, suggests that the dollar is soft this month as summer carry trades, low volatility and weak Federal Reserve expectations spur higher yielding currencies.

Key Quotes

“Financial markets expect Fed officials to be dovish at Jackson Hole given the symposium will be on ‘Designing Resilient Monetary Policy Frameworks for the Future’. San Francisco Fed President Williams’ essay calling for a rethink of monetary policy in a low natural interest rate world is also keeping Fed expectations subdued. July’s FOMC meeting minutes were similarly seen as dovish.

But the risks are rising sharply of a strong dollar reversal in the next couple of weeks. First, the FOMC minutes predated July’s strong payrolls. Another firm release for August due on September 2 would make three consecutive strong jobs reports. Second, Williams, New York Fed’s Dudley and Atlanta Fed’s Lockhart argued last week that markets are underpricing the risk of Fed hikes with all three asserting September’s FOMC meeting will be live. Dudley in particular with his Fox interview and separate press briefing later in the week appears to have gone out of his way to push back on low Fed expectations. His interventions matter given his closeness to Fed Chair Yellen. Last, Governor Kuroda has begun to talk up the prospects of further easing when the Bank of Japan reviews its policies on September 2021.

The dollar is trading towards the low end of its one year ranges against the euro, yen, Australian and NZ dollars of 1.051.16, 99125, 0.680.78 and 0.620.73 respectively. Currency markets thus look vulnerable to a sharp reversal in sentiment well before the Fed meets next month.”