Summary:

• EURUSD nears 1.21, AUDUSD on 2-year highs as US dollar tumbles
• US bond yields collapse on Irma fears, monetary policy
• Gold above $1350, USDJPY breaks the key level
• Data from Asia unimpressive but markets focusing on other things

A massive weakness of the greenback is the name of the game towards the end of the first full week of September. Just when it looked bad for the greenback and you could thing “what could get worse?” it seems like everything did. First and foremost investors flock to safety as Irma shows its devastating power and is about to hit the US coast during the weekend. Amid concerns about the US economy and Fed’s willingness to continue with rate increases any major damage to the economy could be decisive and make the policymakers even more cautious. 

A satellite image of Hurricane Irma on Thursday afternoon. The Hurricane is expected to strike Florida on Saturday. Source: NY Times

Second, the Fed itself is dumping expectations fast. Yesterday’s remarks from Dudley that “a sharp downturn in inflation is certainly a surprise” could seal a scenario in which the Fed delays any more hikes beyond this year. He also added that asset valuations are not too troublesome and that yield curve looked good – remarks showing that the Fed could be ok just to seat and watch when it comes to rates. Dudley is close to Yellen so he might represent the way of thinking at the Fed at the moment. 

Finally, let’s not forget about politics. A 3-month deal on debt ceiling and a spending bill could look good on the surface but the fact that Trump struck this deal with Democrats and against his own party (leaving the House speaker Paul Ryan looking awkward, to say the least) could backfire at him very soon. It’s hard to imagine now how Republicans could stay unified behind him on his tax agenda.

All those factors had a major impact on the US bond yields which in turn propel fx and gold moves. The US 10-year bond yield collapsed to just 2.01% from above 2.6% in March when some hopes for economic reforms were still alive. When you look at the chart of gold it’s clear that it’s yield that is pushing gold prices higher with the nearest resistance around $1377/oz.

Gold prices are driven by US bonds. The key $1377 level is no longer so far away. Source: xStation5 

USDJPY move could have serious consequences as the pair literally crushed the 108.25 support, opening a possibility to test pre-election levels in a longer run. 

USDJPY broke through the key support and could see more downside over a medium term. Source: xStation5 

The data from Asia was pretty much ignored. China did not impress with trade balance shrinking from $46.7 billion to less than $42 billion on stronger imports and weaker exports. Meanwhile Japan revised its Q2 GDP growth from 4% to just 2.5% annualized, below the market consensus. In New Zealand manufacturing activity in the second quarter improved from 3.1% to 3.9%, one of the reasons why the kiwi is the strongest G10 currency today (gaining an impressive 1.2% against the greenback).  

Looking forward one could wonder if the things have not gone too far. Fears related to Irma could have only a temporary impact on the markets and some recovery in the US yields could be understandable. However, as usual a tipping point is difficult to trace in such situations.