- Jackson Hole speech met with kneejerk USD reaction
- BoJ's Kuroda commits to do more to hit inflation target
- Weak CHF could be a key trade if the US hikes rates
Diverging US and Japanese policy plans could lead to big movements in USDJPY. Photo: iStock
By John J Hardy
US Federal Reserve chair Janet Yellen’s remarks on Friday set loose a kneejerk reaction to the strong side for the USD as the first headlines surprised markets. This was due to the fact that Yellen’s opening remarks provided short-term forward guidance on Fed policy and the current economic situation, something that was not expected in the context of Jackson Hole.
On closer inspection, though, the guidance wasn’t very specific and the balance of the speech was more typical Yellen rhetoric, with a cautious discussion of where the Fed has come from in its policy development and where it is likely to go in the future if the economy falters again. The emphasis for the latter was “more of the same” and a belief that quantitative easing works.
She did, however, suggest that a broadening of Fed asset purchases is worth considering and indirectly seemed to suggest that renewed asset purchases are preferable to negative interest rates. She also echoed some of the more pointed comments of her Fed colleagues on the advisability of fiscal policy to help spark growth and discussed the low productivity conundrum and idea of raising the inflation target, but didn’t make any strong commitment here.
It was actually only vice-chair Stanley Fischer’s subsequent “clarification” in an interview of what Yellen meant that really got the market moving as he suggested that two hikes are in play (September and December) if the data are strong enough.
Meanwhile, Bank of Japan governor Haruhiko Kuroda committed to doing more to keep Japan on track to reach its inflation target, talking up the potential for more negative rates and more action. Wouldn’t it be ironic if further rate cuts on September 21 work to weaken the JPY (with USDJPY trading below 105) where they failed when USDJPY was trading above 118.00?
That could certainly be the case if the reach for yield theme continues to retreat.
Today we risk some degree of quiet after Friday’s storm as the UK is out on a bank holiday and the next round of data that has a clear bearing on whether Friday’s Fed rate hike talk will amount to anything arrives near the end of this week, of course mostly with the Friday US jobs report. But the technical quality of the signal on Friday was quite good with an outside day reversal in US interest rates (higher and the key benchmarks through important resistance – 0.80% in the US two-year) and in USD pairs.
USDJPY is confirming the divergent momentum (higher MACD at second of the double bottom) with Friday’s strong close. Traders’ will fret how aggressively the pair should be bid up in the near term with the key US data today (PCE inflation) and later this week (ISM Manufacturing and the jobs report Friday), and then the Fed and BoJ meetings on September 21.
The first minor area is just above 102.50 and then it is on to the Ichimoku cloud levels, with the top of the cloud near 105.00 until about September 15, when it starts dropping.
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Source: Saxo Bank
The G10 rundown
USD – strongly supported by Friday’s market action – coincident indicators for a further appreciation of the USD likely to be both risk appetite (lower) and interest rates (higher) as USD strength is the flipside of the “reach for yield” trade that was the theme in recent weeks.
EUR – EURUSD struggling at and below the pivot area of 1.1200/50. We’ll need a full breakdown this week to confirm Friday’s developments, though EUR looks to have a low beta to the USD move relative to JPY and the higher yielding currencies.
JPY – USDJPY is the ground zero of USD direction here amid the nervous wait for the BoJ and FOMC on September 21 – the most critical coincident indicator for more USDJPY upside from here is perhaps more yield upside for US treasuries.
GBP – noise increasing on Brexit and the timeline for an invocation of Article 50, but this is going to be a long-term process that we will all thoroughly tire of long before anything actually happens. As for GBP, it found resistance after some slippage through the 1.3250 area and the focus is lower as long as the USD is stronger. For EURGBP, the 0.8500 area has shaped up as the key support level.
CHF – USDCHF has suddenly come alive due to the key trigger we have identified previously as important for blasting CHF traders out of their slumber – higher US rates. The signal is especially interesting as EURCHF has pulled to the top of the range. Is the weak CHF an awakening giant of a trade if US rates head sharply higher from here?
AUD – AUD vulnerable to further risk-off from the reversal of the “reach for yield” trade and bears will note the crumbling of the 0.7600/0.7575 area. RBA meeting next week.
CAD – USDCAD having a look above 1.300 again, though CAD may have less beta to USD strength than AUD and NZD.
NZD – the kiwi should be very sensitive to higher US rates and weak risk appetite as it was previously turbo-charged by the reach for yield theme.
SEK – apparently suffering as smaller currency at the hands of weaker risk appetite. Would suspect that the SEK continues to have a positive correlation, but ow beta to risk appetite. Watching 9.50/52 area in EURSEK for whether we launch another test of the highs and beyond.
NOK – NOK unlikely to shine with weak risk appetite and sideways or lower oil – confirmation that EURNOK bears’ hopes are thoroughly dashed would arrive with a rally above the 9.35 area.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Bank Holiday Today
- 0730 – Sweden Jul. Retail Sales
- 1230 – US Jul. Personal Income/Spending
- 1230 – US Jul. PCE Inflation
— Edited by Michael McKenna
John J Hardy is head of FX strategy at Saxo Bank