Deciding on the dollar

August 31, 2016

We enter the last trading day of August, a month that has been dominated by growing debate as to whether the Fed should increase interest rates at their September meeting. This could be decided by the Employment Report, released Friday. But for the moment, the market has been moving more towards that possibility. This is most prevalent on USDJPY, given that there has also been debate on the other side as to the possibility of the BoJ implementing more easing measures in the coming weeks. Just what these could entail is another matter, given that the central bank has thrown pretty much every tool it has at the problem of low inflation (and deflation) over the past several years. Nevertheless, the yen has been underperforming all other major currencies over the past week in response to such speculation. It has also taken the pressure off USDJPY, which has moved away from the 100 level in recent trading sessions.

Whilst the dollar has been in the ascendancy, the outlook for the single currency has been a little more, mixed. We’ve seen very slow and steady against sterling, taking EURGBP down towards the 0.8500 level in recent trading sessions, from the 0.8725 high seen mid-August. For the most part, the single currency has been caught between the policy dynamics of the US and Japan, but in the case of a Fed tightening next month, the euro could perform comparatively well on the crosses. In times of risk aversion, the strong currency account surplus has often proven to be a support for the currency as investors flee currencies with more vulnerable funding needs. For now, the 115.00 level on EURJPY remains key, a close above here not seen since late July.

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