Head of FX Strategy
Summary: The Fed isn’t really in control of where it must head, but it can determine the pace of its progress, and therefore will drive the near term gyrations across asset classes. On that account, all eyes and ears are on Powell’s speech this Friday at Jackson Hole.
Trading interest
Markets are quiet ahead of a number of important inputs in coming days, especially as we await a sense of whether the Fed is catching up with the curve or still behind it as we get a look at tonight’s FOMC minutes and, more importantly, Fed Chair Powell’s speech on Friday. What I will be looking for in the minutes and especially the speech is whether the Fed begins to recognize the dynamic that is driving its policy to zero and into QE: tightening liquidity due to Trump’s escalating deficits. On Friday, Powell is expected to speak on “challenges for monetary policy” – challenges indeed as Powell is firmly wedged between a rock and a hard place. The Fed must abandon all principles and head straight to zero and restart massive QE – likely to balloon to $200 billion per month or more if the US is tilting into a recession over the coming few quarters - or crash global markets and lose control of the interest rate if it fails to restart balance sheet expansion rather soon. The Powell Fed can only choose whether they would like to control the policy rate or control the Fed’s balance sheet – there is no real other choice as Trump’s deficits are in the driver’s seat.
Signs of a Brexit thaw? An interesting day yesterday from EU leaders, first as European Council President Donald Tusk penned a rather brusque tweet, followed by much softer rhetoric from German Chancellor Angela Merkel, who suggested yesterday that there are ways to create a “practical solution” to Brexit that doesn’t involve reopening the exit agreement. “The moment we have a practical arrangement with which we can uphold the Good Friday agreement and still define the limits of the domestic market, we won’t need the backstop anymore.” Whether this can continue to reverberate in the near future is an open question, but it is an important signal.
Risk appetite eased yesterday near important resistance in the major US equity indices, but has bounced again overnight, taking the JPY down a couple of notches and EM up a couple of notches, though trading ranges are very compressed. All are waiting on the signal from the Powell Fed on Friday for the next move up or down in risk and the US dollar.
We await signs from the ECB minutes tomorrow, as well as the flash August EU PMI’s. The Italian drama is on a slow boil after yesterday’s resignation of the political unaffiliated Prime Minister Conte, now awaiting whether the Five Star Movement can piece together an awkward coalition or President Mattarella calls elections (which have a strong chance of delivering a Lega led, all rightist coalition). Italian yields are still well elevated relative to Spanish and Portuguese counterparts, but the recent developments see the yield spread to Germany yawning in the middle of the recent range. As our Christopher Dembik points out – Japanese investors, among others, have been active in the Italian sovereign market.
The G-10 rundown
USD – all about whether the Powell Fed can pull ahead of the curve here as indicated on Friday. A tall task to deliver a sufficiently dovish blast to the market.
EUR – EURUSD is heavy toward the bottom of its range. The status for all USD pairs hinges on Friday’s Powell speech. So far little drama in Italian bond markets (or in the euro) on the latest political developments, well-covered by Bloomberg’s John Authers covers very well this morning.
JPY – the yen has lost energy here – waiting for further invigoration of the recent rally via lower yields and risk off or squeeze risk starts to set in – staring with around 107.00 in USDJPY.
GBP – sterling saw modest support from Merkel’s comments yesterday – headline risk remains extreme – technically, the 0.9100 area in EURGBP the closest pivot area of note for indicating more significant sterling strength.
CHF – not much seems to quicken the pulse for the France – no real reactivity to yesterday’s Brexit and Italy news flow – suggests EURCHF heavy until proven otherwise, with SNB leaning heavily against the move.
AUD – the pause button pressed two weeks ago in AUDUSD as we await news from the Aussie economy, whether US-China sit down to talk, and Powell’s speech.
CAD – as we discussed yesterday, Canadian CPI today a key data point for whether USDCAD rally can punch through the important 1.3300-25 zone (weak attempt yesterday unsuccessful).
NZD – AUDNZD upside remains in focus as the RBNZ has pulled ahead of the RBA in the competitive devaluation game. The high-flying New Zealand A2 Milk company’s stock took a large hit overnight
SEK – EU PMI’s perhaps the next focus as SEK may wilt further on additional signs of the EU economy slipping, with risk appetite an important input at the margin for SEK direction.
NOK – EURNOK consolidation still very organized in the 10.00 area.
Upcoming Economic Calendar Highlights (all times GMT)
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