Jackson Hole Symposium Leads to Renewed Dollar Selling

Market Analysis /
28 Aug 2018

The fall out from the Jackson Hole Economic Symposium is going to dominate the early part of the week as markets look to reevaluate a number of new narratives at certain central banks. 



After Friday’s Jackson Hole speech from Fed Chairman Jerome Powell it seems that there is now a renewed feeling of relief around the US economy. Meeting minutes from last weeks had shown that the Fed had worried that Trade Wars were the biggest risk to the strong US economy. The key takeaway from Powell speech on Friday was the point about an overheating economy. Powell noted that there were not immediate signs that the economy was overheating, pointing to the fact that again we could be on for 2 more rate hikes in 2018.

This week will see attention shift back to the macro economic picture, however that doesn’t mean we can forget about Donald Trump’s legal headache. Any further inflammatory headlines about the current administration, or from the President himself will be greeted with the usual amount of US and global volatility. This could be another hugely testing week from the President and with that sort of story hanging over the markets we could be in for a volatile US dollar, but without any real direction.



Investors this week will be looking to leading Eurozone economic indicators to gauge the ECB's mood for policy change when we come to the mid-September rate-setting meeting. In Germany, this week the August IFO data will be a focus, while the August Eurozone CPI data on Friday will also be closely watched to see if inflation remains above the key ECB target rate of 2%.

Political risks remain a short-term factor for the EUR – with both Turkey and Italy still bubbling in the backdrop. On the former, Turkey's markets return from holiday – while on the latter, there's a Fitch ratings agency review on Italian sovereign debt at the end of the week. These lingering political uncertainties suggest that EUR pairs could be a focus for many investors looking to dodge the murky US political story.



Brexit reared its head again this week after new Brexit minister Dominic Raab announced almost a warning note explaining the changes the government expect should negotiations end in a no deal scenario. Despite the gloomy outlook Raab did state that neither did the government want, accept or expect a no deal scenario.The positive note from the The EU - UK press conference is the acceptance that the EU and Barnier are not looking to force the UK off the edge of a cliff, and that a deal is mutually beneficial to both parties.

But when it comes to GBP and political risks, it is far too early to signal the all clear; the biggest test for the pound will be the return of a divided UK parliament from their summer recess and the upcoming Party Conference Season. A murky UK political backdrop may continue to put a dampener on GBP in the near-term.



With domestic data remaining strong the attention for the Loonie will shift to the September Bank of Canada meeting. We could be in a situation where the lack of a NAFTA deal means that the currency is not yet pricing in the rising expectation of a rate hike next week. Currently there is only a 27% chance of a ret hike, but the flurry of positive data, and the expectation that a deal on NAFAT is only round the corner could mean the BoC is ready to surprise the market and make another move.

The key to another move could well be Wednesday’s Q2 GDP data on Wednesday, with estimates coming in at 2.8% an in line reading or small beat would lead to the probability of a rate hike jumping. Governor Poloz also hinted at his Jackson Hole speech that the stronger economy could give the central bank the chance to advance.



The near-inevitable resignation of Australia's Prime Minister, Malcolm Turnbull, on Friday resulted in a leadership contest that saw Treasurer Scott Morrison narrowly pip Home Affairs Minister Peter Dutton to become Australia's sixth leader in just over a decade.

While the AUD saw a knee-jerk move higher on Morrison's appointment, the fragile political backdrop still remains a cause of concern. The week ahead sees the closely watched 2Q Private Capex data due for release on Thursday with markets expecting a minor uptick to 0.6% (versus 0.4% prior). This may provide a bit of temporary support to the AUD.



It's been a pretty quiet week for the NZD – which has simply matched the ebbs and flows over the broader global risk environment. RBNZ Governor Orr at Jackson Hole reiterated that the central bank intends to hold policy rates low for an extended period of time, he also didn't rule out a rate cut if needed. This sentiment is likely to keep a lid on short-term New Zealand rates and the Kiwi dollar. The only small positive for the NZD right now is the speculative markets' extreme short positioning. The week ahead sees Aug business confidence data – which is worth keeping an eye on given that the RBNZ has cited weak investment intentions as a reason for a more subdued outlook for the New Zealand economy.

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