yellen testifies :
Janet Yellen's semi-annual testimony on Capitol Hill Tuesday is the most highly anticipated event risk this week. In the most ideal scenario traders are hoping for 2 outcomes -- an increase in volatility that widens ranges for currencies and clarification on when the central bank will raise interest rates. Unfortunately sharing this information won't create the best outcome for the Fed. While policymakers around the world are worried that low volatility is creating complacency in the financial markets, they do not want monetary policy signals to cause unneeded volatility, especially at critical points in their recovery. Even though yields moved higher ahead of Yellen's testimony, in all likelihood, her comments will fail to satisfy dollar bulls and the market in general. In other words, we see more downside than upside opportunity for the dollar Tuesday but the smarter move may be to wait for Yellen to speak before taking action because only a surprise will provide us with a tradable move in currencies. Traders should look to buy dollars if Yellen acknowledges the recent improvements in the economy and says that rates could rise early next year. However if she goes out of her way to distinguish the difference between the end of tapering and the beginning of tightening and refuses to specify when rates will rise, the dollar should decline which could provide an opportunity to sell the greenback but the opportunity is less attractive since we believe the downside in the dollar is limited. JP Morgan (NYSE:JPM) published an interesting study over the weekend that found that since 2009, volatility in Treasuries increased in the week prior to the semi-annual testimony and compressed on the day of, which is an argument in favor of a benign reaction to the testimony. U.S. retail sales and corporate earnings are also scheduled for release Tuesday and we wouldn't be surprised if they end up having a bigger impact on the dollar. Instead the best trade is to be long carry going into and on the back of Yellen's testimony.
