A return to the Goldilocks trade?

John Hardy

Head of FX Strategy

Regarding Federal Reserve chair Jerome Powell's Jackson Hole speech, the initial focus seems to be on his comment that there no signs of inflation pickup accelerating now that it has risen above 2%, and that there are no signs of overheating. The knee-jerk reaction here is to sell the USD as emerging markets and risk appetite celebrate this as non-hawkish. 

Some of the USD reaction could also be on China's move earlier today to signal stronger intervention in the CNY level. I don't see enough in this speech specifically to drive a sustained USD weakening; if the dollar does weaken anyway, we'll have to look for other reasons beyond this speech.

Ultimately, it seems at the moment as if the market has put the Goldilocks scenario back in the microwave and is reheating on 'turbo' setting. I am a bit reluctant to believe we will see this trade put back on in a big way, but narratives are narratives and flows are flows. Before the Goldilocks idea extends for too long, however, we should all remind ourselves that Powell is far, far more on point regarding the risks from financial excesses. If this risk-on trade has been put on simply due to the comments on inflation and no signs of overheating, also consider this quote from the same speech Powell delivered today: 

"Whatever the cause, in the run-up to the past two recessions, destabilising excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses."

For the full text of Powell's Jackson Hole address, click here.

 

You can access both of our platforms from a single Saxo account.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)