By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Fed Chair Jerome Powell’s comments at Jackson Hole sent the U.S. dollar lower against all of the major currencies today. Powell confirmed that further gradual tightening will be needed but investors were not impressed and instead focused on his comment that there’s no sign of inflation accelerating and no elevated risk of it overheating. This along with the Fed minutes, which showed concerns about trade, housing and emerging markets cast doubt on a December hike. Every piece of U.S. data released this week also deteriorated with durable goods, existing and new-home sales falling. Revisions to Q2 GDP, personal income, spending, Chicago PMI and the trade balance are due for release next week but we don’t think they will help the dollar.
Looking ahead, it’s the end of the summer in Europe and North America and the week before a major holiday in the U.S. Most of the major event risks are behind us and with minimal data on the calendar liquidity will truly subside. We never believed that August would be a dull month in the forex market but now that we are at the tail end of it, we could finally see trading ranges narrow and currencies settle before everyone returns after the U.S. Labor day holidays. Politics has been as much of a focus as economics for the greenback. So far, teflon Trump has lived to survive another day despite his personal lawyer’s accusation that the president has committed a crime. However if the situation worsens and a sitting president becomes indicted, it could be a strong blow to the dollar.
After a dramatic week of party infighting and back-room backstabbing, Australia’s political troubles have been resolved for the time being and AUD/USD rallied in relief. Former Treasurer Scott Morrison will be the country’s sixth prime minister in 11 years. Malcolm Turnbull lost a power struggle within his own party and is being replaced by the least volatile option. The new Prime Minister lifted the political uncertainty and prevented the Australian dollar from falling to fresh yearly lows. However as our colleague Boris Schlossberg pointed out, all the political theater is unlikely to have much geo-political impact on the currency as Fitch reaffirmed the country’s ratings. Of much greater importance are the growing tensions with China, especially after Australia banned Huawei (SZ:002502) from the 5G build out on security grounds. The weakness in iron ore and copper prices are also weighing on the unit and could renew its slide in the week ahead as there are no Australian economic reports scheduled for release.
The New Zealand and Canadian dollars also extended higher. NZD was supported by this week’s stronger than expected second-quarter retail sales and a smaller than anticipated trade deficit but the data isn’t great because the annual trade deficit hit its largest level since March 2009. Dairy prices also fell further, which could reduce the value of dairy exports going forward. Central Bank Governor Orr said this past week their biggest challenge is getting inflation to rise and they haven’t ruled out cutting interest rates to achieve its target. We’ve been skeptical of NZD/USD’s rally for some time and see the spike at .6720 as a potential near term top. Even if NZD/USD continues to recover, it may find it difficult to rise above the July high of .6860.
Euro climbed to its strongest level in 3 weeks. Despite the persistent rise in Italian yields, U.S. dollar flows and short covering has taken the pair sharply higher. Sterling also extended its recovery but the lackluster rally signals that investors are still worried about Brexit. They are skeptical of the recent progress and unhappy about the reports that the October deadline for a Brexit deal could be pushed out by 4 weeks. Nonetheless, Michel Barnier the EU’s Chief Brexit negotiator said negotiations have reached the final stage and they will hold continuous talks from here forward. Barnier’s eagerness to cooperate is a breath of fresh air but the Irish border and other issues are difficult ones and until real agreements are made, investors could refrain from buying the currency. There were no major economic reports released this week and nothing substantial on the calendar next week. Technically, GBP/USD is in a downtrend as long as it remains below 1.2950. Euro climbed to its strongest level in 3 weeks. Despite the persistent rise in Italian yields, U.S. dollar flows and short covering have taken the pair sharply higher. Sterling also extended its recovery but the lackluster rally signals that investors are still worried about Brexit. They are skeptical of the recent progress and unhappy about the reports that the October deadline for a Brexit deal could be pushed out by 4 weeks. Nonetheless, Michel Barnier, the EU’s Chief Brexit negotiator, said negotiations have reached the final stage and they will hold continuous talks from here forward. Barnier’s eagerness to cooperate is a breath of fresh air but the Irish border and other issues are difficult ones and until real agreements are made, investors could refrain from buying the currency. There were no major economic reports released this week and nothing substantial on the calendar next week. Technically, GBP/USD is in a downtrend as long as it remains below 1.2950.