Micro USD correction
“We are seeing a bit of a usd correction on the back of two things:
1) Some position adjustment into Jackson Hole. Janet Yellen’s speech is on financial stability so it is natural for dollar shorts to have some concern given there is almost nothing priced in for the Fed at this point. The market has pretty much come to the conclusion that the Fed is done hiking so there is some room for a surprise but no real reason to expect one.
On the Draghi side, again a market that has bought a lot of euros is sensible to wonder (especially post-ECB minutes) whether or not Draghi might push back on normalization in his speech at Jackson Hole given the rise in the EUR. The more I think about it, the more I doubt it. EURUSD was 1.1520 at the last ECB meeting (July) and now it’s 1.1765. Not exactly a massive ratchet. And while inflation is stalling, it has not really moved either. And a big part of the reason for reducing asset purchases is related to legal limits and the end of the political emergency, not inflation.
So… I can see the logic for why the market might want to take some short dollar chips off the table into Jackson Hole, but I doubt anything particularly EURUSD negative will emerge. But today is only Tuesday and the fireworks are not until Friday. Note that Mr. Draghi also presents the keynote at a meeting of young economists and Nobel laureates tomorrow morning (3AM NY) in Lindau. I scoured the web but could not find the title or subject matter for the keynote. Then, Friday at 10AM NY we get Janet Yellen on Financial Stability and 3PM Friday we get Draghi’s luncheon address.
2) A pretty weak article on Politico. With nothing priced for tax reform I guess any hope is better than nothing.
It is hard to ignore the Provident news out of the UK as it is another bit of evidence that British consumers are hurting. On the other hand, the Provident move is reminiscent of Home Capital Group’s woes in Canada, and so the market will hesitate to push all-in after getting rivered by Buffett on HGG in May. While many (including me) thought Home Capital was a canary in the coal mine, the company has already paid back the full amount ($1.6B) of the punitive loan from Warren Buffett. We still might look back in a year or so and see Home Capital, the collapse in Toronto home prices and the crash in Provident as the start of a global real estate correction. Or b.
Finally, while the big drop in Transports in late July correctly foreshadowed the August SPX swoon, I think it is interesting that we have not yet come close to challenging the June/July triple bottom around 2400. With the VIX back on a 12 handle, I would think the risk for the SPX over the next few days is a bounce to 2460. The tiny chart shows S&P futures in black vs. VIX (inverted) in pink. Have a solid day.”