Sometimes it’s Best to Bet on Second Place
The reason that betting on the second best performer in a trend is that the hot money tends to flood into the leader. In this case it's the US dollar and on some metrics that move is beginning to look overdone. When the inevitable correction comes, second best is the safe place to be.
On Wednesday, the US dollar continued to outperform following the FOMC minutes. The knee jerk came on headlines that said “many” Fed officials said job gains could bring a sooner rate rise. The market generally moves on the headlines and looks deeper later. The actual text was more nuanced saying that “if” progress toward objectives was quick “it might” be appropriate to hike sooner.
In any case, the market voted for the US dollar, sending USD/JPY to 103.85 (near the April high) while the euro and cable continued to trace out cycle lows.
We argued for US dollar strength early in the week but the market will now laser in on Yellen's speech and the dollar bulls sitting on profits are likely to head to the exits.
AUD/USD is one spot a retracement could materialize but in the short-term the risks come with the HSBC China PMI at 0145 GMT.Barring a surprise from the 51.5 consensus there's a base in the Australian dollar that could last. Stevens' comments yesterday basically ruled out a rate cut and removed the threat of intervention. If risk assets continue to rise the carry trade could also give the Aussie a lift.
|Markit Manufacturing PMI (AUG) [P]|
|55.7||55.8||Aug 21 13:45|
|PMI (AUG) [P]|
|51.5||51.7||Aug 21 1:45|
|Eurozone Markit PMI Composite (AUG) [P]|
|53.4||53.8||Aug 21 8:00|
|Eurozone Markit PMI Manufacturing (AUG) [P]|
|51.4||51.8||Aug 21 8:00|
|Eurozone Markit Services PMI (AUG) [P]|
|53.6||54.2||Aug 21 8:00|
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