Key data flow keeps Fed, ECB in focus
The US Dollar spent most of last week in wait-and-see mode as markets braced for a speech from Fed Chair Janet Yellen at the US central bank’s annual symposium in Jackson Hole, Wyoming. The gathering has frequently served as the venue to unveil major turns in monetary policy.
Traders speculated that Yellen might use the occasion to set the stage for “quantitative tightening” (QT), the gradual unwinding of its massive balance sheet accumulated following the 2008-9 global financial crisis. When the fateful day finally arrived, Yellen conspicuously steered clear of any policy guidance.
Not surprisingly, this led a disappointed greenback broadly lower against its G10 FX counterparts. In another curious display of resilience however, the benchmark unit managed to hold up within the range that has confined price action against an average of the most-traded majors for the better part of a month.
Gold prices echoed the US currency’s performance, showing ample intraday volatility but ultimately failing to break out from their own congestion range. The yellow metal epitomizes anti-fiat assets – the Dollar’s polar opposite – and its lack of conviction seems to confirm that hopes for a hawkish Fed remain alive.
A stream of top-tier economic data will continue to steer this narrative in the week ahead. A revised set of second-quarter GDP figures, the Fed’s favored PCE inflation measure and the always closely monitored set of official labor-market statistics are all due to cross the wires.
Realized US data outcomes have steadily improved relative to consensus forecasts since mid-June. This hints that analysts’ models are underestimating the economy’s vigor and opens the door for more of the same ahead. If this proves to be the case, USD may come roaring higher as bets on stimulus withdrawal heat up.
It’s a public holiday in most of the UK Monday so the week will likely begin slowly for the British Pound. It is also a week largely devoid of toptier data. However, there are two data points towards the end of the week that could move the British Pound.
First up Thursday is GfK’s measure of UK consumer confidence, followed Friday by the purchasing managers’ index for the UK’s manufacturing sector. Among economists, the consensus forecast is that both fell marginally in August, consumer confidence to -13 from -12 in July and the manufacturing PMI to 55.0 from 55.1.
As always, significant deviations from those numbers could move the currency either way but, from a technical perspective, it does seem to have stabilized after its recent sharp losses. Given the sharp fall in the US Dollar Friday after Federal Reserve Chair Janet Yellen steered clear of the subject of monetary policy in her Jackson Hole speech, a better way to look at the Pound’s progress last week is to look at EUR/GBP.
That continued to climb MondayWednesday but then fell a little until the post-Yellen drop in the Dollar lifted it again.
This week was somewhat of a wash for the Japanese Yen, as the currency moved sideways against the British Pound, Aussie and US Dollar. The Yen did show a bit of deference to trends of strength in the Euro and CAD, as the one piece of significant Japanese data for this week indicated continued weakness in inflation. The bigger item of interest across global markets was the Jackson Hole Economic Symposium, where investors came in with piqued interest around the prospect of Quantitative Tightening. But in an excellent example of wordsmithery, Fed Chair Janet Yellen didn’t touch any topics having to do with monetary policy or outlook; as she instead focused on banking regulation and reform, specifically dialing-in on recent efforts to repeal policies that were put in to place after the Financial Collapse.
As we discussed last week, the inflation print released on Thursday was the highlight of Japan’s economic calendar. This was inflation for the month of July, and for the fourth consecutive month inflation came in at .4%, which is heavily below the 2% target from the Bank of Japan. This means that we’re probably nowhere near any rate hikes or policy tightening, such as what Central Bankers in Europe are currently staring down. This also means that there are very few reason for investors to look at the long side of the Yen under the expectation that anything on that front will change anytime soon.
But as we’ve been seeing for much of the year, the Yen has displayed some element of strength against many major currencies. This is likely related to the ‘unwind’ effect as risk aversion has begun to show with a bit more prominence in key areas, such as European stocks and, more recently, US equities. With Japanese rates remaining in negative territory while inflation continues to languish heavily below the BoJ’s target, the Yen could still be fairly attractive for carry trade scenarios. This is especially applicable when matching up the Yen with currencies that are seeing higher rates get priced-in, like with what we’ve seen out of Europe so far this year and, more recently, Canada. But – when the prospect of principal losses outstrips that of the potential gain on the carry, traders will ‘unwind’ positions as they duck for cover, and this is probably why the Yen has been relatively strong against a wide swath of currencies from slow-growing economies.
Next week brings little by way of excitement on the Japanese economic calendar. We do get a series of medium-impact prints throughout the week: Jobless numbers on Monday, Retail Trade on Tuesday, Industrial Production on Wednesday, Housing Starts on Thursday and Consumer Confidence on Friday. Each of these could have some bearing on inflation, but given how stubborn prices have been in Japan throughout the year, the prospect of anything more than a quick move around any of these data points seems to be a bit of a stretch from where we’re currently at. More pressing for the Yen will likely be macro-related from high-impact data releases out of Europe and the United States, and how each of those may push or pull on risk aversion or tolerance. Europe has a series of CPI prints coming-out on Wednesday and Thursday, and out of the US, we get a basket of drivers that could bring some work-able moves into the Japanese Yen. For the US, we have Trade Balance on Monday, Consumer Confidence on Tuesday, the 2nd read of Q2 GDP on Wednesday, PCE on Thursday and a strong finish to the week with NFP and ISM Manufacturing on Friday.
For those looking at exposure in the Japanese Yen, as we’ve been saying, traders will likely want to pick their spots. If looking for Yen weakness under the presumption that risk aversion will fade away as US and European Equities continue their years-long rally, the long side of EUR/JPY could be very attractive. For those that want to play a continuation of risk aversion, the short-side of GBP/JPY could be interesting for such pursuits. Against the US Dollar, traders will likely want the range that’s built-in over the past four months to first give way before making any directional prognostications.
For the currency has been unusually listless against its US cousin and its torpor has also been evident against other things too, notably the Japanese Yen. None of which is to say that things look especially bad for the Aussie. Even if it is refusing to budge much it is usually doing so quite close to its highs for the year.
However, it is within reason to assume that the expected optimism from Federal Reserve Chair Janet Yellen, and the expected reassurance that rates could yet rise again this year, might be bad news for the Aussie. After all, if the Federal funds target rate goes up by just one more quarter-percentage-point then the Australian Dollar’s yield advantage over the greenback will finally be toast. Of course, that difference would be largely psychological in impact, but psychology is important in foreign exchange.
We probably shouldn’t overplay this though. Markets have already had ample time to consider Aussie yield erosion. Jackson Hole aside there are a few data points coming up next week which might move the currency. China’s Purchasing Managers Indexes could do the trick, although when it comes to China the Aussie has been quicker to slide on weak numbers than to rise on strong ones in the last few months. Closer to home, Australia’s building and manufacturing sectors will also see data releases. Strength here could keep the admittedly quite distant prospect of higher Australian interest rates alive, and support the currency.
Ultimately though, we come back to where we have been these past two weeks and that is effectively at the doorstep of the Reserve Bank of Australia. The RBA was quiet last week, but before that had been telling all that it did not want to see excessive Australian Dollar strength. The suspicion that the RBA is watching the market very carefully is keeping a lid on the Aussie. I think it will continue to do so this week, which is why I am neutral yet again.
Gold prices are higher this week with the precious metal up 0.48% to trade at 1288 ahead of the New York Close on Friday. Price action this week remained uninspiring until Friday’s Jackson Hole event fueled a brief surge in volatility. The gains come on the back of persistence weakness in the greenback with the DXY trading just above the yearly lows into the close of the week.
Remarks made by Federal Reserve Chair Janet Yellen at the annual Jackson Hole Economic Symposium offered little guidance on the future of monetary policy. Her comments continued to reinforce the notion that the central bank is in no rush to normalize. In fact, Dallas Fed Preside Robert Kaplan went as far as to note that the terminal Fed Funds rate may be closer to as low as 2.5%. The result saw the dollar come under significant pressure, to the benefit of bullion prices.
Looking ahead to next week, traders will be awaiting the release of the US August Non-Farm Payrolls report with consensus estimates calling for a print of 180k as the headline unemployment rate holds at 4.3%. With the labor markets more-or-less at ‘full’ employment, Fed officials have continued to be plagued by slow inflation – look for the wage inflation figures to drive broader dollar price action on the release. For gold, while the underlying fundamentals remain constructive, prices are approaching the yearly highs and put the immediate advance at risk heading into 1300.
A complex charting pattern is aligning with a hurricane hurling toward the Texas coast, and traders seem confused. Take heart, it’s OK, and you’re not alone. A key driver of Oil demand has been refiners, which are aligned alongside the Gulf Coast of Texas (where this poor boy vacationed as a young man). Refineries have been preparing this week for a Tropical Storm turned Hurricane by limiting refining activity, which is reducing much of the demand seen in the Oil market. Friday’s EIA Crude Oil Inventory Report showed that US Oil inputs (refining activity) are at record levels with a comfortable margin (~600,000bpd).
The production aspect of Oil in Texas is in West Texas, far and away from the hurricane. Additionally, Oil production is not expected to slow down where we could see a mismatch once again between supply, which is steady, and demand that is dropping as refiners prepare for the first hurricane of Harvey’s strength to hit Texas in 13 years.
Now, on to the charts. We’ve been watching last week’s extremes to anticipate where price will likely move. Last week’s low of $45.38 and last week’s high of $49.13. A break below $45.38 would open up a chart pattern known as a corrective triangle. The correction would be from the move from $50.20 to $45.38. A break below $45.38 would favor an eventual move to the lower $40/bbl zone where Oil consistently has found support. A break above $49.13 would invalidate this view. Until $49.13 is broken, I will now look lower as demand could be broken by Harvey sending gasoline prices higher, and Oil’s price lower. A temporary effect to be sure as these markets are often correlated, but traders should be on the watch for short-term Oil weakness if more refiners are taken offline than previously expected.