Jackson Hole APAC Breakfast Edition
Today’s focus will clearly be on the Fed Chair Janet Yellen’s speech at Jackson Hole, which is scheduled to be delivered at 10 am EST. According to the Curriculum, the topic is “Designing Resilient Monetary Policy Frameworks for the Future”, which is, in itself, a rather academic-sounding piece and unlikely to answer investors primary concern as to when are interest rates going up? However, as is the case with most Fed speaking engagements, it will mainly involve deciphering verbal gymnastics while looking for a smoking gun.
Traders will look for Dr. Yellen’s views on shifting Global and Domestic Economic landscapes as well as the all-important cost benefit of maintaining the status quo, the “lower for longer” interest rate theme.
Most traders have ruled out the Hawkish Pain Trade, a September Hike, while positioned for a more likely outcome that the Feds will nudge December, keeping expectations higher, while maintaining a dovish lean.
The market is now very comfortable with low volatility, and while the Feds are likely a bit concerned about investors taking too much repose in this period and perhaps taking on much bigger risks, it is unlikely that the Feds will aggressively alter the funding landscape to avoid massive market fall out.
It has been another quiet session for the Australian Dollar as we walk into the same market from yesterday. It is no surprise that Traders are patiently waiting for comments from Yellen as position unwinding dominates flow. At this stage, most traders do not believe tonight’s comments will ignite the next significant dollar trend, but there is sufficient two-way risk to keep inventories and positions light and tight.
With Jackson Hole dominating market sentiment, traders have ignored moves in industrial and precious metals as well as oil markets. Clearly, the monetary policy theme is dominating the landscape, but I expect Hard Commodities and Oil price movements to come back in focus next week.
It is a bit perplexing that the Australian Dollar has been impervious to underlying commodity price changes, but AUDUSD price action is telling me the market is not expecting any hawkish tack from Dr. Yellen tonight.
Jackson Hole is only one piece of the puzzle as a trader looks forward to the Bank of Japan Sept 21 meeting, which will be a pivot point for USDJPY. Overnight, the pair bounced higher on short covering, which was not unexpected.
Some early reports have suggested that the Government Pension Investment Funds return may have dropped into negative territory; a notion which is having a limited market impact at this point.
It is the second day that the PBOC is doing a 14d reverse repo this week. The last time the central bank used a liquidity injection via the 14d instrument before was in February 2016. Naturally, this event has a few tongues wagging while raising more questions than it has answers.
At this point, I do not view this as a change in monetary policy, but rather nudging borrowers towards longer term funding and perhaps the first stages of implementing a transparent funding band. Bondholders typically like funding with the cheapest end of the curve, which is the overnight Repo markets, and this move could pressure bond markets as funding cost would move higher. It is also designed to ensure that short-term money gets distributed to the economy and not speculators.
Oil prices have risen again after reports that a US Navy ship has fired three warning shots because an Iranian patrol boat came within 200 yards. The WTI rose from 46.40 to 47.44 where it closed out the NY session.