Long End Takes Center Stage as FX Market Waits on Jackson Hole

This week has been relatively quiet in the foreign exchange market, but one area that's gaining attention is the long end of the Treasury market.

With interest rates already on the rise, the market is looking for cues from the Federal Reserve and other central banks. However, it seems that the Fed's message may not be as important as the bond market's reaction to it.

According to ING's Chris Turner, the market is expecting a modest 8-9 basis point tightening in September, which would likely support the dollar against low-yielding currencies like the yen and euro. However, if long-term yields start rising, that could signal duration stress, fiscal risk, and a higher cost of capital.

This could have significant implications for high-yielding carry currencies, as well as the Swiss franc, which may rediscover its defensive bid. Meanwhile, the yen becomes harder to read as higher US yields support it until the move in rates itself begins to damage risk appetite.