R-Stars to Falling Stars
The Kansas City Fed’s annual symposium held in Jackson Hole, Wyoming is turning into this year’s most anticipated event when it comes to US monetary policy. While Jackson Hole rarely disappoints the “Econ- Geek” in all of us, traders are on high alert after a befuddling policy divide amongst Fed Members and will keenly view this year’s symposium for any tidbits or clues to future directions in monetary policy.
With the table set, after influential Fed members took to the wires in discombobulated fashion after the July FOMC minutes uncovered a dovish leaning Board in contrast to the hawkish siding regional Fed Presidents. Even more, impressive was the fact traditional Dove Fed Presidents took to the Hawks Nest while one even managed to fly back and forth.
But, traders would be wise to take serious the events from last week while considering the real possibility the Fed may restart the path of gradual rate hikes mothballed in early 2016. Recall that interest rates pigeonholed initially for fears relating to China Slowdown, but if not for the May NFP outlier and the Brexit induced pause for the cause, we may be debating a second 2016 rate hike at this juncture.
Investors appeared to take these warnings to heart on Friday after San Francisco Fed President John Williams followed his Alaska speech with the comment that the September FOMC meeting is “in play”. Market pricing for a Fed rate hike this year poked above 50% with bond yields prodding higher across most markets, and the USD had a less cloudy day in the Sun.
AS for Brexit, while it is unlikely that price adjustments in Foreign Exchange and other Asset Classes are entirely played out. But so far, the financial system has performed admirably under the strain, and that should give Fed member the confidence to lessen policy accommodation gradually without fearing upheaval in the financial markets
China remains a wildcard as Traders continue contemplating the rumours about an agreement between US and China to keep interest rates from rising too fast or unexpectedly. Early in the year, the Fed was clear about the Global impact from Chinas economic slowdown but less so of late with the RMB remaining calm. But with the G20 Hangzhou summit slated for Sept 4-5, there is even less incentive for Dr Yellen to Rock the boat at Jackson Hole as China has likely conferred their plans to reveal some form of policy measures at the G-20 summit.
The FOMC reconvenes on September 20, and while it is unlikely we (Traders) have under-priced the possibility of a September rate hike, Investors need to be on guard for a significant jump in odds for December and beyond. Currently, the probabilities are teetering around 20%( SEP) and 50% ( DEC), respectively, based on Fed Funds Futures.
Ultimately Dr Yellen will view September Fed Futures based probability as ample justification to delay the rate hike in the sense the Feds have not rightfully guided the futures market to the appropriate 50-70 % level for fear of creating unnecessary market turmoil. It’s unlikely Jackson Hole will be the catalyst for that swing, Perhaps all this rate hike nudging by Fed Speakers is to prepare the market for December. The Federal Reserve Board will not tighten without guiding the futures markets to at least a 70 % probability as they will not ignore the lesson of 1994 when the last surprise Fed rate hike was followed by ” The Bond Market Massacre” of 1994
Aussie Dollar – A Falling Star
The Australian dollar was a falling star after Moody’s Investor Services cut their outlook on domestic banks to negative from stable while highlighting a plethora of reasons including low pay increases, record low-interest rates and rising household debt for the decision. Keep in mind, Australian Banks are amongst the higher rated banks in the world but are facing increasing bad loan provisions from the mining sector and households in those respective regions due to job loss.
Keeping things in perspective, Standard and Poor’s placed Australian Banks rating on negative back in July based on the fact that Australian Banks borrowing cost would accelerate if the Federal Government came under Debt Rating pressure. While it’s hard to avoid short-term volatility on the back of debt agency musings, currency reactions to rating downgrades tend to be short lived, as we’ve seen so often in the past.
However, the ” higgledy–piggledy” Price action during the past few session indicates that traders are at a minimum starting to re-think the low volatility carry strategy underpinning the Australian Dollar. The rejection of .7700-20 zone in the face of supportive Employment Data does suggest the Aussie Bears are gradually awakening from hibernation believing the Aussie is topping.
Whether the particular trigger is the rating agency outlook or the shift in Fed Rhetoric, the truth likely lies somewhere in the middle
The Australian Dollar is back pressuring the .7600 level after the USD has opened a bit higher across most majors following weekend remarks by Fed Vice Chair Stanley Fischer, the elder statesman on the FOMC who’s roosting with the Hawks. Reflecting on the Fed’s dual mandate, Fischer told a Colorado audience that “So we are close to our targets”, noting the core PCE inflation was “within hailing distance” of 2% and unemployment “close to most estimates of the natural rate.
On the domestic front, we have a relatively quiet week so external factors will drive the Australian Dollar. But we should expect an uptick in volatility to muddle through during the build up to Chairperson Yellen’s August 26 speech at Jackson Hole,
There are many hurdles needed to overcome for a September US rate hike which should provide enough excuse for Dr Yellen to press the ” pause ” button once again likely deferring the decision until December. This outcome could appeal to the commodity currencies and provide a tailwind for the Aussie bulls
Japanese Yen – Apprehension Dominates
USDJPY is expected to trade within the broader ¥.99- 102 range near term.This morning we’ve perched apprehensively today as the USD has opened a bit higher across most majors following weekend remarks by Fed Vice Chair Stanley Fischer, the elder statesman on the FOMC who’s is roosting with the Hawks. Reflecting on the Fed’s dual mandate, Fischer told a Colorado audience that “So we are close to our targets”, noting the core PCE inflation was “within hailing distance” of 2% and unemployment “close to most estimates of the natural rate,
However , there has been good selling interest above ¥100.60 in early trade with the Fed Dovish element in the market selling into this morning USD bounce
With this round of cards dealt, there appears neither sufficient reason or cause to either ” Raise ” bets or ” Fold ” cards at this juncture. And while lacking conviction in either direction, trade as the threat of intervention may provide sufficient buffer to keep the downside momentum temporarily in check in the face of Fed policy uncertainty.
Beyond the veiled threats of intervention, traders continue discounting the BoJ ability to stem the strengthening YEN tide and if as expected, Dr Yellen maintains a Dovish Fed tack, traders will be quick off the mark testing the BoJ resolve and will likely assault the BREXIT ¥.9902 lows Traders will be
Yuan- Not Much to See Here
Expect another week of tight ranges to prevail in the lead up to the G20 in Hangzhou. Given this is the marquee event in China for 2016, there’s huge motivation for policy markets to
keep markets stable. And while there will be some intermittent externally induced volatility from US economic data and Dr Yellen Jackson Hole speech, the market is not overly concerned about any internal or external unexpected policy shock. Lack of overall enthusiasm should keep the RMB currency complex running in neutral until the G20.
Ringitt – Stars Align
We could see an extension of the Ringgit Rally below 4.00 USD MYR this week with oil prices continuing to rise and resumption of the USD downtrend after the Greenback had its day in the sun on Friday. The expected catalyst for the USD dollar will be increasing expectations that the Feds will remain in ” pause ” for a cause mode, while oil prices should remain supported by OPEC production freeze speculation.
