- Fed's Williams says economy is at low growth/low inflation juncture
- Comments echo earlier ones from Fed's Bullard
- Might Yellen echo them once more in Jackson Hole next week?
Possible policy tweaks from the Fed soon? Pic: iStock
By John J Hardy
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The San Francisco Fed’s John Williams (not a Federal Open Market Committee voter this year) published a piece late yesterday at a conference and argued that the US economy is in a low growth and low inflation state that risks worse recessions if the Fed doesn’t change its orthodoxy and bring new policies to the table, including higher inflation targets, fiscal stimulus and even nominal GDP targeting (printing enough money to ensure that growth reaches a minimum level).
See Reuters article
for coverage and the full essay
here. The St. Louis Fed’s James Bullard was out recently with similar language and argued that the Fed should only hike once between now and the end of 2018. The USD has wilted overnight on this development, with EURUSD challenging the key 1.1200/50 resistance and USDJPY having a look at the pivotal 100.00 level.
The timing of these speeches is rather interesting as we look forward to the Jackson Hole conference, at which Fed chair Janet Yellen will be speaking next Friday – could she confirm this new shift by some members of the Fed? Williams, after all, was one of Yellen’s key subordinates at the San Francisco Fed. The awkward part of the Fed’s shift is that it is in a dovish direction and asset markets are already getting more than a bit bubbly.
The Reserve Bank of Australia minutes were rather dovish in that the interest rate cut was seen as unlikely to stoke housing market rises, leaving the path open to new cuts in the future, and sending short Australian rates lower to new lows for the cycle. The attention on the possible shift in the Fed’s policy dominated, however, and AUD actually rose versus the USD, but fell versus the JPY and NZD, among other currencies.
The USD is bumping down around key support levels here, with things looking quite pivotal if it heads lower still here – it would appear the key calendar focus is Yellen at Jackson Hole next Friday and then the September 8 European Central Bank meeting, followed by the Fed and Bank of Japan meetings on September 21. Meanwhile, Donald Trump’s spectacularly self-destructive trajectory of the last couple of weeks seems to be downgrading the market’s anticipation of the November 8 presidential election.
USDJPY is pushing down to the 100.00 area again after the latest language from the Fed’s Williams which seems to be indicating a shift in Fed thinking and an adjustment to an ultra-low interest rate and low-growth environment that will require new tools to address.
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The G-10 rundown
USD – under pressure after Fed’s Williams piece out yesterday and EURUSD trading at post-Brexit highs this morning – can the pair actually get something going? We may be required to shift USD view lower for the near term if Yellen underlines Williams essay themes. If we do see a shift – higher CPI numbers would have little impact on Fed anticipation.
EUR – trading higher on EURUSD squeeze – not seeing the independent drivers for Euro until we hear the ECB at the Sep 8 ECB meeting.
JPY – USDJPY pushing close to the 100.00 level as BoJ and Abe have work cut out for them to weaken the currency if Fed leaning more dovish.
GBP – Sterling bouncing back versus the USD, but still weak against the Euro, as EURGBP looks toward 0.8800 and potentially even 0.9000 if tomorrow’s data is particularly weak. UK CPI up today.
CHF – not standing out much here, but USDCHF local support failing and EURCHF heading closer to range low toward 1.0800.
AUD – despite RBA minutes, market bids up riskier currencies on liquidity implications of potential Fed dovishness. AUDUSD looking higher on a strong close today as recent bearish reversal failed to put on any confirming momentum.
CAD – stronger oil prices seeing bid in CAD, if a modest one as main driver is USD weakness here. Plenty of range to work with down to 1.2500 if 1.2830 or 1.2650 can’t contain the downside.
NZD – outperforming the AUD as RBA minutes see AUDNZD dipping. NZDUSD may look higher again if it can retake 0.7300 as bearish reversal was never confirmed. But watch NZ Q2 jobs numbers tonight.
SEK – EURSEK bouncing after steep sell-off. Bears might light to get involved ahead of 9.50 to see if we eventually head back to the range below 9.40.
NOK – EURNOK bouncing after tremendous sell-off, but bears may be quick on the scene soon as long as oil remains bid and risk appetite strong.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Jul. CPI/RPI/PPI (0830)
- Germany Aug. ZEW Survey (0900)
- Canada Jun. Manufacturing Sales (1230)
- US Jul. Housing Starts and Building Permits (1230)
- US Jul. CPI (1230)
- US Jul. Real Average Weekly Earnings (1230)
- US Jul Industrial Production and Capacity Utilization (1315)
- US Fed’s Lockhart to Speak (1630)
- New Zealand Q2 Unemployment Rate/Employment Change (2245)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank