As the world waits with bated breath for Janet Yellen's statement this afternoon - which is uniformly expected to be a nothing-burger, some are wondering if the recent flip-floppery by Yellen, Draghi (and even Kuroda with his 'actual' tapering while lowering inflation expectations) does not leave today open to another modest shift back in The Fed's 'hawkishness'. As Bloomberg's macro strategist warns, this sets the market up for a surprise and as he warns: "Dollar risks are starting to seem skewed all one way: toward an immediate rally."

There’s extremely bearish positioning, that’s failed to adapt to changing circumstances, into event risk that’s structured to surprise in the opposite direction. That’s an explosive mix.

 

When something seems so obvious, your immediate instinct should be to ask, "what’s the catch?" My problem is that this time, I just can’t see one.

The dollar is poised like a coiled spring against so many other currencies. Some of them have started to retrace on their own -- AUD, JPY and KRW as some examples -- but the FOMC can trigger all the rest at once today.

 

Investors have suddenly become inordinately focused on disappointing inflation data from the U.S. Inflation prospects have looked subdued for months so it seems completely irrational to expect the FOMC to use a meeting with no press conference to now significantly alter their guidance.

The committee is attempting to normalize policy as a strong labor market and roaring financial assets give it a window to act, not because of runaway inflation.

Exceptionally easy financial conditions show policy makers still have room.

 

It’s completely fair to argue that they may start fearing deflation again at some point. But this isn’t the meeting that they’ll choose to radically shift the official stance.

And that stance is still that 2017 will see both the beginning of balance sheet reduction as well as another rate hike. Again, that won’t change today.

If anything, the risk is that they give an exact start date for balance sheet tapering and it’s sooner than the market expects. Bloomberg Intelligence notes that an operational advantage of announcing a timeframe this week is that it would allow the Treasury to lay out its intended response in the quarterly refunding statement due Aug. 2.

The market is complacently short dollars as we enter the height of summer illiquidity. That’s despite yields jumping higher on Tuesday, with U.S. terms-of-trade that have been improving all year, and with other major central banks -- the ECB, BOJ and RBA -- emphasizing their dovish credentials.

A dollar rally can be short but violent. The conditions and the catalyst are both primed and ready.

Does Cudmore have high conviction? His answer is clear.

Yes. For a reason.

What’s the alternative? The FOMC sounds slightly more dovish? So what. The market’s already very short dollars. It won’t be inclined to add aggressively to that going into August.

As I wrote on Monday, politics are a red herring and financial assets rarely move in a straight line. Beware the dollar jack-in-the-box.

He may be right - given the extreme 'short' dollar positioning (dovish) and what is now a record short speculative position in 2Y Treasury Futures (hawkish)...

The market hopes that Yellen doesn't misstep.