Goldman Sees Pound, Yen and Kiwi Most Exposed to Yellen Shock

What Will We Hear From Fed's Yellen on Friday?
  • Currencies are most likely to gyrate on a Fed surprise
  • Global foreign-exchange volatility rises to one-month high

Goldman Sachs Group Inc. sees the pound, the yen and the New Zealand dollar as most vulnerable to a potential surprise from Federal Reserve Chair Janet Yellen’s Aug. 26 speech at the annual monetary-policy symposium in Jackson Hole, Wyoming.

The three currencies have been most sensitive to changes in two-year interest-rate differentials between the U.S. and their respective markets during the past three months, according to research by analysts Robin Brooks and Michael Cahill. A move in the differential by 0.1 percentage point in favor of the dollar could push the pound 1.5 percent lower, the research shows.

Yellen’s speech on the Fed’s monetary-policy toolkit in two days is widely expected to give clues on the path of U.S. interest rates and has pushed global currency volatility to a one-month high. Investors’ sentiment has shifted back and forth in recent weeks on how aggressive the Fed will be in its approach to monetary tightening after it raised borrowing costs in December for the first time since June 2006.

“While the direction of recent Fed commentary has no doubt been dovish, it is also fair to say that Fed communications have been erratic this year,” Brooks and Cahill wrote in their note to clients. Goldman Sachs is the world’s seventh-largest currency trader by market share, according to Euromoney magazine. “The pound, the yen and the New Zealand dollar should react most in the event of a surprise on Friday."

A JPMorgan Chase & Co. gauge of global currency price swings was at 10.31 as of 5 p.m. in New York, matching the highest since July 25. The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, rose 0.2 percent. The U.S. currency strengthened 0.4 percent to $1.1264 per euro and added 0.2 percent to 100.45 yen.

The probability of a U.S. rate increase at the Fed’s next meeting on Sept. 21 rose to 28 percent from 24 percent at the start of this week, and the chances by the end of the year are 54 percent, according to data compiled by Bloomberg from fed fund futures.

“It is fairly quiet on the volumes front, which means when something does go through -- even if it is in small size -- you are prone to more volatility or jumpy markets,” said Mazen Issa, a senior foreign-exchange strategist at Toronto-Dominion Bank in New York, who sees the outlook for the dollar skewed toward strengthening. “The U.S. dollar has sold off enough in recent weeks that the risks look asymmetric to the topside.”

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