Article / 26 August 2016 at 8:00 GMT

From the Floor: Where to follow the USD when it moves

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From the Floor
By Michael McKenna

Hunters and hikers alike know that in the moments before a large predator arrives, the forest grows deathly quiet. Far away near the horizon, one might see a flock of indistinct birds. But beyond that, nothing.

Today, of course, the rough beast approaching is the US Federal Reserve, whose chair Janet Yellen is set to speak at the ongoing central bankers' summit in Jackson Hole, Wyoming.

Yellen's address comes in the wake of conflicting Fed noises, with even the normally buttoned-down Wall Street Journal calling the mixture of dovish and hawkish squawks issuing from the Eccles Building "schizophrenic". But wherever today's address leads, investors will likely seize upon whatever portents it offers, parsing every word in an effort to extract the truth about the US economy.

Is it outperforming and ready to continue down the path of policy normalisation? Or is it so flawed and distorted by continual stimulus that it cannot withstand even the smallest of hawkish incursions?

"We need to get past Yellen's speech for any real action in the bond market," says Saxo Bank fixed income trader Michael Boye, adding that yields are edging stealthily higher ahead of the 1400 GMT speech.

Boye also reports that the Jackson Hole summit is not traditionally a venue for direct policy statements, so there remains a distinct possibility that Yellen's remarks could fail to clear up the current uncertainty.

One data point in favour of an uneventful Wyoming address, notes the Saxo bond trader, is the fact that Saudi Arabia has postponed its bond issue until after the Federal Open Market Committee's September 20-21 meeting in Washington.

"We could be in for a disappointment," concludes Boye.

Whatever the content of today's speech, however, knees are bound to jerk – if only because they have been so still for so long. Three venues where this may play out most notable are the USDJPY, gold, and crude oil.

In yen terms, today's address will come at an interesting inflexion point as poor inflation data released overnight appear likely to weigh on the Japanese yen in the medium-term (read: after Janet).

According to Singapore-based Saxo trader Edmund Liu, the Tokyo core CPI reading came in at minus 0.4% with the national print out at minus 0.5%. Markets had expected minus 0.3% and minus 0.5% respectively.

The soft inflation release may, says Liu, point to further easing from the Bank of Japan at its September 21 meeting. The BoJ has been out lately speaking of unconventional measures, including so-called "helicopter money", as part of its effort to boost growth and rein in a surging yen.

If this trend materialises at the same time as a hawkish fed-spurred bout of USD strength, the USDJPY chart could change dramatically.

Sideways into the speech (USDJPY 15-minute):

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Source: Saxo Bank 

In gold, Saxo Bank head of commodity strategy Ole Hansen reports that the yellow metal is resting near a one-month low, adding that exchange-traded product holdings have begun to increase over the past five days.

"Gold is in a narrow range between $1,319/oz and $1,357/oz," says Hansen, adding that silver is at risk of a 3.5% drop if prices slip below $18.48/oz while platinum is exposed below $1,074/oz.

These trends, of course, will jump into action should today's Jackson Hole speech underwhelm, knocking the wind out of King dollar.

In oil, Hansen tells us that crude is caught between weak supply/demand fundamentals and a steady buzz of Opec chatter. At present, Iranian officials appear likely to attend the upcoming summit in Algiers while the Saudis are talking of output freezes again. Whatever the truth behind this latest flurry of verbal intervention, though, crude prices will likely be one venue in which dollar sentiment moves the needle rather dramatically in today's New York session.

In stocks, Saxo Bank head of equity strategy Peter Garnry tells us that he thinks the Fed "wants to move", and is basing medium-term moves on the projections for a stronger USD outlined by Saxo chief economist Steen Jakobsen earlier this week.

(Garnry's SaxoStrats trade view on GDX, launched Tuesday, has already returned 10% on a pre-Jackson Hole tumble in the gold miners' ETF.)

Finally, Garnry also reports that he sees gains ahead of Danish wind-power specialist Vestas, whose Q2 earnings release showed a strong order book and a sales forecast upgrade.

Saxo's equities head also notes that the firm has acquired UpWind and Availon, "increasing Vestas' exposure to the post-installation service business".

In the short term, though, it's all Jackson Hole and it's all Janet Yellen. While the US has posted some very strong gains in employment of late, inflation and wage growth are proving harder to boost and recent talk of expanding the Fed's toolbox could be read as hinting that the situation is more fragile than it may appear.

As of this morning in Europe, however, it's all speculation. We don't know what she'll say and how markets will react. The forest is deathly still and as was once noted in a more esoteric context, "the predator's mind is baroque, contradictory, morose".

If this was easy, though, we'd all be rich already.

All quiet on the western front
"Do you hear something?" Photo: iStock 

Michael McKenna is an editor at

From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.   
Aspirin Aspirin
Morning call link not working for me
Nplatz Nplatz
Morning call link not working for me/ Same for me.
Michael S. McKenna Michael S. McKenna
The morning call link should be working now. Please let us know if it isn't.
abach abach
It is ridiculous how everything now depends on what Yellen will say. This is like religion, not science. It actually does not matter what she will say. The real economy is in trouble and Yellen will change nothing. She went simply to the wrong school and does not understand the science 'economics'. If You at all believe that what is in the economics school books is a science....


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