High Or Low FX Expectations For Jackson Hole?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The event that investors have waited all week for is finally here. Central bankers from around the world are gathering at Jackson Hole over the next few days for the Federal Reserve’s economic symposium. The topic is “fostering a dynamic global economy,” but the focus will be on Janet Yellen and Mario Draghi’s plans for monetary policy. Expectations are high for this annual event but in our experience, central bankers are eager to under deliver. Due to the uncertainty in the global markets and recent sell-off in U.S. stocks, there’s no better time than the now for Yellen and Draghi to stick to the script. For Yellen, that means confirming balance-sheet changes are needed to ensure future financial stability. But she may not say much more to avoid creating greater uncertainty ahead of the debt-ceiling fight, which could be viewed as a disappointment by dollar bulls. Leading up to her speech, we still expect the dollar to hold onto its gains as investors hope for hawkishness from the Fed. The dollar could also rise on her comments but unless she says rates are rising in December, the gains probably won’t last. The latest U.S. reports provided no support to the greenback as jobless claims ticked up and existing home sales dropped for the third time in four months. Durable goods orders are scheduled for release Friday but Fed Chair Yellen’s speech at 10AM NY Time/14 GMT will be the main event.

ECB President Draghi won’t give much away either when he speaks at 3PM NY Time/19 GMT. A few weeks ago, there was a lot of talk that Draghi would use Jackson Hole as a platform to prepare the market for changes in ECB policy but more recently, ECB sources have suggested to the media that he will not deliver a new policy announcement. Since then, the market completely downgraded its expectations for Draghi after the minutes from the last ECB meeting revealed concerns about an overshooting currency. However over the past 72 hours we’ve also heard from a number of ECB officials who seem to be taking every opportunity to spread their hawkish wings. This includes ECB member Schauble who said Thursday that the central should tighten policy sooner rather than later. On Wednesday ECB Hansson downplayed the 13% rise in the euro year to date, saying that the its gains so far are not a big change. Before that, Weidmann said he “sees no acute need to extend QE into 2018.” These consistent comments just days before Jackson Hole suggest that even if Draghi stays tight lipped that come September, the ECB still plans to take steps to normalize policy. So the big question Friday is whether Draghi wants to send EUR/USD to 1.20 before the ECB meeting or give it the opportunity to ease off its highs before reigniting the rally. We think he will choose the former rather than the latter.

Sterling gave up early gains to end the day unchanged against the greenback. Second-quarter GDP growth was confirmed at 0.3% but private consumption was slightly lower and government spending was higher. GBP was initially bid higher on EUR/GBP selling but as the euro reversed its slide, sterling turned lower. We still think GBP will fall, especially after the surprisingly large decline in the CBI Distributive Sales survey. This little-known report has a strong correlation with retail sales and its weakness raises concerns about spending going forward.

The Canadian and Australian dollars ended the day unchanged while the New Zealand dollar fell for the third day in a row. The loonie's strength can be attributed entirely to the rise in Canadian yields because oil prices fell more than 2%. While loonie traders may have ignored the move on Thursday, if prices continue to fall, it could spark a near-term bottom for USD/CAD. No economic reports were released from Australia but New Zealand’s trade balance beat expectations coming in at 85M vs. -200M expected. Economists had been looking for the country to print a trade deficit in July but with exports rising a little more than anticipated and imports rising a little less, the overall balance remained positive. Looking ahead, AUD and NZD remain vulnerable to additional losses as they hover below the 20-day SMA. USD/CAD, on the other hand, is hanging tight ahead of Jackson Hole.