Dollar Buoyed by Positioning for Possible Jackson Hole Rebound

  • Yen snaps four-day advance as geopolitical concerns stabilize
  • Gamma trading may dictate price action amid thin data calendar

Aberdeen's Athey Says U.S. Dollar Is Oversold

The dollar rose against most Group-of-10 peers amid profit-taking on short positions and as fresh long exposure was added before the Federal Reserve’s annual economic symposium later this week.

The Bloomberg Dollar Spot Index rose by 0.3 percent as of 10:22 a.m. London, following a drop of 0.6% since Friday. Some investors trimmed their short exposure in the greenback after the gauge hit a three-week low on Monday, according to traders in Europe, looking to add again should the rebound in place start losing steam. Leveraged accounts were also seen adding fresh long positions as they see upside risks into Federal Reserve Chair Janet Yellen’s speech at Jackson Hole, Wyoming on Friday.

Even as the dollar gauge looks to erase Monday’s losses, the medium-term outlook was little changed. The downtrend this year remains firmly in place, with August’s trading pattern resembling more of a consolidation phase than a significant rebound. Bloomberg’s fear and greed indicator suggests bulls are in control this month, yet the U.S. currency trades just 0.4 percent higher.

Long-volatility trades remained in demand as the Jackson Hole summit has the potential to move markets even if it fails to be characterized as a game changer. Front-end volatilities in major currencies retain a bullish bias while on longer tenors, long-vega trades lose traction.

  • After a speech by ECB’s vice-president Vitor Constancio, large expiries in the euro and the yen may dictate price action
    • The market looks short-gamma outside Friday’s ranges and may end up in chasing price action, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
  • The yen was lower for the first day in five as caution over the Korean peninsula remained in the background
    • USD/JPY rose as much as 0.4% to 109.46, its highest level since Aug. 18; offers up to 109.50 absorbed buying pressure, with additional offers seen at 109.75-80
    • Vol skew exhibits similar reaction, with one-week 25d risk reversals rising to 107 bps in favor of USD puts, compared to 119bps on Monday
  • The sterling was among the main laggards also in part due to uncertainties over Brexit negotiations; the U.K. government is to release a third paper that will offer details on on how it sees its future relationship with Europe
    • Cable maintains its consolidation pattern since dropping below the 55-DMA on Aug. 15 and orbits 1.2850; the technical gauge now stands at 1.2930 and forms the first, strong resistance for the U.K. pound; Friday low at 1.2832 the first support
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