US$ Continues to Improve Following Yellen Comments on Friday

USD

The U.S. dollar has carried its positive momentum from Friday into today session with the Bloomberg Spot Dollar Index touching a two-week high.  The greenback rallied across the board throughout Friday after Federal Reserve Chair Janet Yellen indicated that interest rate hikes are still on the table for 2016 and may come as early as September.  Her comments echo more bullish comments from other policy makers during the second half of August and are starting to reflect the coordinated effort of policy makers late last year to telegraph the central bank’s intentions.  The chance of a September rate hike has risen to 42% from about 25% before Yellen’s speech.  Chances of a hike by December have shot up to 65% from below 50% less than two weeks ago.

As the Fed remains data dependent, this week’s economic docket should prove important for the direction of the U.S. dollar.  Data released this morning showed that consumer spending in the U.S. advanced for the fourth consecutive month.  The 0.3% gain matched estimates, but last month’s reading was upwardly revised by 0.1%.  Personal spending is the largest part of the U.S. economy.  Personal income also matched expectations of a 0.4% rise.

Only consumer confidence will cross the wires tomorrow before ADP’s Private jobs data and pending home sales on Wednesday. Construction spending, ISM manufacturing and weekly jobless claims are slated for Thursday.  The biggest risk event of the week is Friday’s Non-Farm payroll numbers.  Economists are expecting the economy to have added 180K jobs in August, down from an impressive 255K in July.  A print above 200K should boost interest rate expectations and see the greenback rally.  Conversely, a dismal jobs number will likely see traders kick back expectations of a rate hike until early 2017.

JPY

The Japanese yen has opened the week lower against the U.S. dollar as the yen continues its slide from Friday.  At the same symposium in which the U.S. Fed head said that further tightening of policy is likely in the coming months, the Bank of Japan governor suggested the opposite.  BoJ Governor Haurhiko Kuroda said (again) that he would not hesitate to boost monetary stimulus to prop up the economy and boost inflation.

Recent developments show the diverging central bank policies between the U.S. Federal Reserve and the Bank of Japan.  The Japanese yen is now 2.5% weaker against its American counterpart over the last 7 trading days.

EUR

The Euro has succumbed to overall U.S. dollar strength and is trading 1.0% lower versus the U.S. dollar since Friday’s open.  The European economic docket was fairly light today.  Italian consumer and manufacturing confidence for August disappointed expectations, keeping the index near the lowest reading since early 2015.  We expect volatility in the EUR/USD pair to remain subdued this week as much of Europe remains closed but that should change following the Labor Day holiday in the States this week.

British markets are closed today for a banking holiday.