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Why Yellen’s speech could cause a ‘crash’ in the currency market

Janet Yellen's speech on Friday morning threatens to have a profound effect on the currency market, according to longtime currency trader Boris Schlossberg of BK Asset Management.

The Fed chair's address at the Kansas City Fed's economic symposium in Jackson Hole, Wyoming, is probably the most eagerly anticipated event in an especially slow August for the market. The crucial question, of course, is whether Yellen is biased toward raising the key federal funds rate target this year, or if she is happy to see 2016 go by without even a single hike.

"Any equivocation by Ms. Yellen will be met with a dollar rout in the FX market," Schlossberg predicted. "Stakes are higher than normal."

"The currency market is already, at best, skeptical that the Fed will raise rates this year," and if Yellen doesn't reassure traders that she will do so, the U.S. dollar/Japanese yen cross "will crash below 100 and most likely break the post-Brexit lows of 98," Schlossberg said.

Given the greenback is currently trading at 100.53 yen, that would represent a huge move for a major currency pair.

In recent days, Dallas Fed President Robert Kaplan, Kansas City Fed President Esther George and, most importantly, Fed Vice Chairman Stanley Fischer have all indicated that a rate hike could still be appropriate this year. Last week, New York Fed President William Dudley said September remains on the table.

"It seems unreasonable to expect Yellen [to] substantially deviate" from these views, Brown Brothers Harriman currency strategist Win Thin wrote Thursday.

In fact, given that the symposium is entitled "Designing Resilient Monetary Policy Frameworks for the Future," Thin is skeptical that she will spend a great deal discussing "immediate issues" at all.

Yet silence might not be enough, said Schlossberg.

"She needs to really reaffirm for the market that they are very seriously moving toward a rate hike in December; otherwise I think they stand a very, very strong chance of just losing all credibility, because the rhetoric out of all the other Fed officials has been relatively hawkish," he said Thursday on CNBC's "Trading Nation."

He points out that while recent remarks from Fed officials have sent short-term yields higher, the dollar has hardly moved.

When it comes to the potential for a hike in December, "the most skeptical market in the world right now is the currency market, and she needs to convince the currencies that she is for real at this point," Schlossberg said.

As of Thursday afternoon, fed funds futures imply a roughly 60 percent chance that the Fed will raise rates at least once by December, according to CME's FedWatch tool.

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