FX Week Ahead: Jackson Hole, And A Chance For Yellen To Fend Off Some USD Bashing
By Shant Movsesian and Rajan Dhall MSTA
Coming off a mixed week for the USD, traders focus their attention on the Jackson Hole symposium which starts on Thursday, running through to Saturday. Within this, Friday’s address by the Fed chair will take centre stage, and for all the ‘will she, won’t she’ talk about monetary policy, the market will be hanging on Janet Yellen’s words, as the third rate hike for 2017 remains in the balance. As it stands, ECB sources (always an interesting one that) report that president Draghi will refrain from covering policy matters when he takes to the stand, and we saw this hit the EUR, helping to stabilise the USD index in the process.
Since then, political shenanigans at the White House have again undermined the greenback, with the past week see the manufacturing council disbanded by Donald Trump after a series of resignations prompted by his public address in response to the Charlottesville attack. We then saw rumours hitting social media that Gary Cohn had resigned, but despite being dismissed, cast doubt over the chief economic adviser’s advocacy of the current administration.
Ending the week we saw chief strategist Stephen Bannon removed (in whatever manner this entailed), and through all the above, risk sentiment wobbled (at best) again, and the funding currencies and safe havens led by the JPY and CHF regaining ground. Gold also pushed above $1300, but failed to maintain this key level into the weekend.
Consequently, there will be little focus on the data this week, and to that end we see little on the schedule of note anyway. Markit release their version of manufacturing and services PMIs (Wednesday) which have been at odds with the ISM data lately, and the Jul readings for existing home sales are released on Thursday. Friday’s volatile Durable goods orders will naturally be overshadowed by Yellen’s address, but through the week, economic activity indices from Chicago, Richmond and Kansas are also out.
In Europe, we get the national and composite PMI numbers midweek. On Monday, the German ZEW release their survey results, for comparison with the IFO institute who report on Friday along with the Q2 German GDP data early on in the European session. In all cases, the data will have to be pretty underwhelming to dent the bullish sentiment in the EUR. We saw 1.1700 giving way when the ECB minutes divulged the governing council’s concern over the FX overshoot, and while this may have been addressed vs the CHF and JPY, both the spot and GBP rates continue to find strong demand on dips.
EUR/USD managed to push down to 1.1660, but was swiftly back above 1.1700 again. Liquidity in the summer markets overemphasise the larger orders, with more buying interest noted here down to 1.1610. For EUR/CHF, 1.1225 is the first major support point to note, with much of the latest weakness down to broader risk factors which have naturally pulled USD/CHF back to 0.9600 (and lower) again. 0.9770-75 still the level to overcome for those looking for a more meaningful correction and/or recovery in the USD.
We saw EUR/JPY also giving back early week gains, which saw the 128.00 handle briefly surrendered, but as noted above, the JPY is quick to react to negative risk factors these days, and this is down to the net short positioning in the market. According to the representative CFTC data however, this has been trimmed by some 20% this past week. EUR longs have also contracted, but as above, there are plenty waiting to get back in at lower levels, and impulsively so.
USD/JPY remains well placed to push lower again and retest the new August base at 108.60, through which lie the 2017 lows around 108.15. Fresh demand seen all the way into the low 107.00’s if we do break lower, with the constant stream of surprises coming out of Capital Hill more than capable of seeing this achieved. This should be a broader JPY move however, with the likes of GBP/JPY also showing signs that the upturn has run its course. The commodity Dollars also looked to have topped out vs JPY, with the weekly charts on AUD, NZD and CAD near identical.
Out of Japan, we get the latest CPI stats out on Thursday, and a continuation of a slow pick up will add to some of the more encouraging domestic growth signals we have been receiving of late. Manufacturing PMIs here are out on Tuesday.
The China data slate is empty next week, as is that of Australia, so the AUD will be at the mercy of external factors which are split between the USD and general risk appetite. Hitting the low 0.7800’s this week, we expect the market will be looking for a deeper retrace based on the technical breach of 0.7835-50, but closing well above here on the weekly charts puts this in the balance for now.
Trade data in NZ offers a chance of some differentiation among the ‘Antipodeans’, with NZD tracking the AUD spot for the most part, and keeping AUD/NZD inside a 1.0650-1.0850 range; the upside does look more likely to give way. The recent NZ numbers have not been great, namely jobs growth in Q2. The fiscal clout from the budget surpluses has faded into the background also, though many anticipated this as much of this was fed back into social investment more than business. Gains above 0.7300 look tenuous for now, but demand ahead of 0.7200 sets up a near term stalemate.
One of the more positive developments this week was the cordial start to the NAFTA talks, and although this may sound naive, did give the CAD some relief – as it did the MXN, which both ended the week up on both the USD and the JPY. As noted before, the greater risks lie at Mexico’s door, but for the US, a positive outcome – for all – would temper some of the negative factors hitting USD sentiment at the moment. Nb, Mexican Q2 GDP on Tuesday for those who monitor levels in the current tri party accord.
Canadian inflation on Friday drew an odd response from the CAD as yoy CPI up from 1.0% to 1.2% is little cause for excitement. Given pricing for another BoC rate hike this year is up around 80%, we see the risk to the downside on this basis alone, with some of the more recent domestic readings (trade and manufacturing sales) perhaps reflective of the aggressive CAD appreciation seen in the last few months. We still look for an eventual test of 1.2200-1.2000 lower down, but not ‘all in one go’! 1.2750-1.2800 as expected has contained the upside, and next week will see whether the support just under 1.2600 will hold up for a more significant correction. Wholesale sales, retail sales (both for Jun) and corporate profits due for consideration next week.
GDP for Q2 is the major event in the UK ahead; this released on Thursday along with the business investment levels as the CBI distributive trades survey. Last week, the focus was on the jobs report where we saw wage growth improving, but with the bears gaining the upper hand, GBP relief was short lived, with a deeper probe into the numbers showing real earnings down – as you would expect given the exchange rate fed rise in inflation. Jul PSNB and CBI industrial trends orders are out on the Tuesday.
It took the BoE’s highlighting of their concerns over the Brexit process ahead to curtail Cable strength towards the 1.3300 level, and now the market has been ‘directed’ towards this key and ever-present (!) factor, rebounds see the market jumping in to sell quickly and 1.2900+ being given short shrift. There is no disputing the fact that we tread cautiously from here, and especially so given the EU talks have stalled, with the UK keen to press ahead with transitional agreements, but Europe equally keen to resolve withdrawal terms first.
The low 1.2800’s are providing some strong support in the meantime, but we should all now be familiar with current market persistence in maintaining well established themes. We still expect GBP to push lower, and it is now all about how much breathing space we get between down-legs. Expect very little of this against the EUR as we continue to grind up towards the resistance zone in the 0.9150-0.9250 area.
We also get Q2 growth in Norway on the Thursday, which is the stand out release in Scandinavia. Just as we see in AUD/NZD, there is little to differentiate between the NOK and SEK at the present time, with steadfast parameters in NOK/SEK at 1.0120 and 1.0360 having noticeably contained trade in the past 5 weeks. Parity was momentarily breached at the start of Jul, but strong GDP numbers in Sweden could not generate a fresh move to test these levels. NOK – and CAD – correlations with Oil price have faded at these generally more comfortable levels.