Dollar Flat in Muted Trading Flows Ahead of Yellen's Appearance

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  • Greenback mixed versus G-10 peers as peso, real strengthen
  • Bank of Canada meeting Wednesday holds prospect for rate hike

Markets Brace for Yellen Testimony

The dollar was little changed, erasing modest gains from earlier in the session, as traders looked ahead to testimony beginning Wednesday from Federal Reserve Chair Janet Yellen for direction.

Trading flows were muted to start the week, leaving the dollar mixed against its G-10 peers. Emerging-market FX was also mixed against the greenback as a dip in Treasury yields alleviated pressure on those currencies. The Colombian peso led emerging-market gains, followed by the Brazilian real and Mexican peso, which strengthened for a third day.

  • Investors will parse the text of Yellen’s prepared remarks for clues on any shift in Fed policy since the bank raised rates June 14; text will be released at 8:30 a.m. ET on Wednesday ahead of Yellen’s appearance before a House panel at 10 a.m. Also Wednesday, the Fed will release its Beige Book survey of the economy. Traders are still digesting the June employment report, which showed robust hiring in the U.S. though with benign wage pressures
  • Also on tap for Wednesday is a Bank of Canada policy meeting, where official rhetoric has turned more hawkish amid robust hiring and an upward shift in the trajectory of the economy. The Canada OIS curve shows the market pricing a greater than 90 percent chance of a hike when the bank announces its decision at 10 a.m.
    • Bank of Nova Scotia chief FX strategist Shaun Osborne laid out three scenarios for Wednesday’s BOC meeting, ranging from no change to a 50 bps hike, deeming a 25 bp hike the highest risk. “The statement/press conference tone will be crucial in determining how quickly the Governing Council wants to bring the policy rate back to 1.00%”
    • TD Securities analyst Ned Rumpeltin expects a “hawkish hold” from the BOC, given Canada’s housing and inflation concerns: “There’s a lot of good things in the Canadian economy, but inflation is a big missing part”
  • In Monday trading, USD/JPY was trading above 114.00 and close to its 114.30 session high; JPY is on a defensive footing after Japan June machine orders unexpectedly fell and as Bank of Japan governor Kuroda reiterated willingness to remain flexible on policy. USD pared some of its gain as the 10-year Treasury yield took a modest dip mid-morning. USD may find stop-loss sell orders positioned under 113.50, according to foreign-exchange traders in Asia familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. USD gains were slowed last week by Japanese exporter selling, a trader in London said. The latest Tankan report showed that large manufacturers expected USD/JPY to average 108.31 in FY2017
  • EUR/USD traded near 1.1401 in late trading, above its 1.1382 low from overnight that almost matched the Friday low at 1.1380. Traders say they prefer to buy EUR on dips with bids seen positioned ahead of technical support at 1.1300
  • Despite the prospect of a rate hike Wednesday, the Canadian dollar was little changed vs USD and holding near a 10-month high as WTI crude oil reversed an early fall to hold a small gain for the day
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