- Markets in a holding pattern ahead of Jackson Hole
- Yellen likely to be most interesting from a long-term perspective
- Bank of Japan Sept 21 meeting is another pivotal event
What's it going to be? Photo: Federal Reserve/Flickr.com
By John J Hardy
Markets continue to dither as we await Yellen’s speech at Jackson Hole tomorrow. The Fed chair may have little to say on the near-term prospects for a rate hike, which could see the market knee-jerking the one way or the other when here speech hits the wires.
The more interesting part of what she has to say, as we have covered recently, is whether she underlines the comments of some of her colleagues at the Fed, who point to a lower natural interest rate and other headwinds like low productivity growth and demographics that will require other forces – namely fiscal (are you listening, US Congress?) to come on board if the Fed is every to see its policy rate.
On the one hand, this looks dovish on the surface, but for the longer term, it may suggest the Fed’s disenchantment with the tools it has employed since the global financial crisis and a reluctance to take these up again with the same enthusiasm should the US economy dip into a recession again.
For those wishing to take a longer term perspective, especially amidst the risk that long-term policy thoughts from Yellen fail to spark near-term interest, current market conditions look very reasonable for establishing longer term options strategies, given that implied volatilities are at the lower end of historic ranges and some themes are stretched. Ideas to consider for coming months for thus frustrated with the current lack of conviction and rangebound behaviour:
- The eventual introduction of helicopter money in Japan (a strong hint at minimum of new policy options must be provided on September 21 Bank of Japan meeting if USDJPY is to avoid a push lower to 95.00, though keep in mind that this kind of level offers even more attractive starting point for longer term strategies aimed at
USDJPY upside as currency strength forces BoJ policy.)
- New lows for GBP – GBPUSD has backed up considerably here from the recent lows – 3-6 month strategies for a try toward 1.2500 are worth consideration.
- NZD overpriced – long term NZD puts versus AUD and especially USD.
- EUR – low delta, very long dated strategies looking for new political turmoil to bring new volatility – especially to the downside – for the euro next year are worth consideration.
A fairly clear setup for EURUSD here, where the channel is well established and the tactical pivot to the downside in the 1.1250/00 zone, with a breakdown encouraging a view toward the 1.1000 area gain, while the 1.1400/25 level looms as the near-term resistance if the USD crumbles on dovish Yellen developments tomorrow. (Our strongest belief is that any market reaction based purely on short-term rate hike/no hike signaling will offer very little in the way of a sustained directional move.)
The G-10 rundown
USD – It’s all about tomorrow, with the difficult task of discerning whether the market is interested in any longer term policy signaling for near term price action, even if it is profoundly important.
EUR – German IFO release today has a high profile – a significant miss could spark volatility, especially with key support levels nearby in EURUSD.
JPY – the yen a tough one until we get to the other side of the September 21 BoJ meeting, with 100.00 level in USDJPY an obvious support/pivot level.
GBP – GBPUSD rally pulled through local resistance, but isn’t building momentum as we await the USD’s. Meanwhile, 0.8500 support in EURGBP wasn’t fully cracked yesterday despite a brief foray below that level yesterday – GBP must punch higher here or it risks a test of the lows again.
CHF – USDCHF descending channel is the mirror image of the EURUSD ascending channel. Until EURCHF makes a move out of 1.080-1.0950 and/or new themes emerge (especially higher interest rates), it’s tough to get interested here.
AUD – The 0.7600/0.7575 zone in AUDUSD looks pivotal post-Yellen tomorrow as we await for the market’s reaction. As noted yesterday, fundamentals like the price of copper and the rate spreads are a strong headwind for AUD, though the market has been reluctant to listen amidst the global reach for yield theme.
CAD – we’re bearish of CAD, but waiting for a technical reason to get involved in USDCAD. Longer term options players might consider upside options plays.
NZD – positive milk price forecasts from NZ’s Fonterra overnight boost NZD, but NZDUSD still constrained by the recent highs and AUDNZD is back higher after the news. The kiwi’s remarkable run is impressive, but long term risks are very skewed to the downside for the currency.
SEK – some interesting data today, and EURSEK tried to get a bit interesting yesterday with its latest slide, with more interest if the data catalyzes a drop to the pivotal 9.38/40 area to the downside.
NOK – firmness seems associated with strong G10 smalls at the moment – but can we challenge the 9.20/15 zone in EURNOK without crude oil pulling to strong new highs?
Upcoming Economic Calendar Highlights (all times GMT)
- 0800 – Germany Aug. IFO Survey
- 1230 – US Weekly Initial Jobless Claims
- 1230 – US Jul. Preliminary Durable Goods Orders
- 1345 – US Aug. Preliminary Markit Services PMI
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank