Head of FX Strategy
Summary: The FOMC minutes yesterday showed little discussion of the real drivers forcing the Fed to bring more easing and provided a modest boost to the USD. If Powell delivers more of the same at his Jackson Hole conference speech tomorrow, the USD could be set to rise further.
- Maintaining long AUDNZD with stops below 1.0470 now for 1.0625 and eventually 1.0700
- Staying short EURJPY for 112.00 as long as remains below 119.50
- Long USDCAD for 1.3500+ with stops below 1.3240
The FOMC minutes provided little sense that the Fed either a) has no strong sense of what it will do next and really is simply pouring over the economic data points and especially lagging indicators to make its next policy decisions or b) doesn’t want to talk about the fiscal drivers (massive US deficits) that are preordaining its policy future due to political or “market confidence” reasons. Either way, this offers little confidence that Fed Chair Powell is set to deliver a strongly dovish message tomorrow at the Kansas City Fed’s Jackson Hole, Wyoming symposium that will bring the Fed back ahead of the curve.
While some discussion of the minutes in the press have focused on the dovish portions of the minutes’ “Review of Monetary Policy Strategy, Tools and Communication Practices” and noted that the Fed is set to act more “confidently and pre-emptively in using these tools [forward guidance, QE, etc..] in the future if economic circumstances warranted”, there is little to suggest in the rest of the document that the Fed sees any clear and present danger to the economy that “warrants” the triggering of these tools, nor the recognition of the fiscal pressuring I note above. Hence, Powell will really need to switch gears in his speech tomorrow at Jackson Hole to prevent a further USD spike from here.
The portion of the minutes positioning the FOMC participants outlook is perhaps the most telling paragraph in the monumentally boring minutes:
“In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course. Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months. A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook. “
This is why the yield curve flattened afresh after the minutes as it feels the Fed remains behind the curve. “Mid-cycle adjustment” will go down as the Powell Fed’s “peace in our time” moment.
Today’s ECB minutes may provide indications on the mix of tools that the ECB is mulling at its September 12 meeting – Draghi’s penultimate meeting before his October 24 swan song as ECB president. But the market will prove far more reactive to the latest EU signaling on its fiscal (and more urgently, bank recapitalization…) plans, as the ECB toolkit is seen as largely exhausted.
Germany saw a failed auction of 30-year zero-coupon bonds yesterday, only unloading EUR 824 million of the 2 billion it hoped to sell. This is a strong sign that long yields in Europe, at least, have reached rock bottom. That is not necessarily euro supportive, because unattractive yields across Europe suggest that global investors will give the EU bond market a wide berth.
We have looked for further downside in EURJPY to little avail recently as there has been a general momentum pause in virtually all of the JPY crosses. In the wake of today’s ECB minutes and EU flash PMI’s for August and tomorrow’s pivotal speech from Fed Chair Powell, it is likely time for the JPY rally to either re-engage or face a squeeze. The euro looks particularly heavy here and remains a compelling way to avoid the USD in expressing JPY strength.
EURSEK corrected lower and Swedish rates rose a few basis points at the front of the curve on central bank jawboning. The Riksbank’s Kerstin af Jochnik said that their base case for further rate rises remains in play: “The Riksbank’s base case is for higher rates as early as end of next year and potentially start of next year”. This is a jarring contrast with the ECB’s clear intent to bring more easing, but SEK may have little chance to rally if EU PMI’s are weak and the USD is strong and/or risk appetite is weak. Indications that fiscal stimulus is forthcoming more likely to bring sustained SEK strength than any hapless signaling at the margin.
The G-10 rundown
USD – a tone deaf Powell at Jackson Hole tomorrow would risk a fresh USD spike that eventually would force the Fed’s to bring forward easing anyway (and Trump’s campaign to scapegoat the Fed will escalate).
EUR – the Euro will not find anything supportive from the ECB, and possibly the opposite, while the focus will shift to the fiscal outlook on further signs that the EU economy heading into recession.
JPY – the yen looks primed to gain further here, particularly if Powell disappoint expectations for a dovish turn and global risk appetite wilts again.
GBP – all eyes on this weekend’s G-7 meeting in Biarritz and the tone between Johnson and EU leaders. The 0.9100 area in EURGBP is the local technical line in the sand for any additional GBP strength.
CHF – EURCHF remains heavy and ECB and EU economic data may do little to alleviate the pressure.
CAD – USDCAD dipped yesterday on a slight 0.1% upside surprise on two of Canada’s core CPI measures, but bobs back to 1.3300+, keeping upside in focus, especially if Powell stumbles in reassuring complacent markets tomorrow at Jackson Hole.
NZD – AUDNZD sustaining near 1.0600 looks promising for bulls eyeing 1.0700+ range highs. Note NZ Q2 retail sales data release tonight.
SEK – a decent SEK rally, but the backdrop needs to be supportive to believe that the one-off Riksbank comment can sustain more SEK strength (risk-on, fiscal stimulus coming to Sweden and/or EU, USD weakening are the kind of ingredients we are talking about.)
NOK – see SEK above, though Norway more linked to the global outlook and oil – EURNOK consolidation after the run higher so far very orderly – focus remains higher unless 9.85-80 is taken out.
Upcoming Economic Calendar Highlights (all times GMT)
- 0715-0800 – Euro Zone flash Aug. Manufacturing and Service PMI’s
- 0730 – Sweden Jul Unemployment Rate
- 1130 – ECB Account of last meeting
- 1230 – US Weekly Initial Jobless Claims
- 1345 – US Markit Flash Aug. Manufacturing and Services PMI
- 1830 – US Minneapolis Fed chief Kashkari to speak on Too Big to Fail
- 2245 – New Zealand Q2 Retail Sales ex Inflation
- 2330 – Japan Jul. CPI