- Initial Yellen reaction may mislead if based on short-term implications for rates
- Fed will inevitably present a longer-term policy stance roadmap
- Fed's past policy slammed by leading WSJ columnists
Today is all about the Fed. Photo: iStock
By John J Hardy
Two WSJ columns (The Federal Reserve Needs New Thinking from Kevin Warsh and other from noted Fed commentator Jon Hilsenrath) out yesterday heavily criticise the Fed for its past policy missteps, inability to forecast economic growth or foresee the risks of the credit crisis in the mid 2000’s. The Fed’s arsenal of policy arrows since the crisis is also fair game for criticism.
Hilsenrath’s column in particular connects critical dots in pointing to the Fed’s political vulnerability as the boisterous and divisive 2016 presidential campaign has made it clear that the population at large is beginning to look to the Fed as part of the problem as well and that the social fabric itself is under strain.
These articles point to the mounting long term credibility problem the Fed has been suffering and after more than two years into Yellen’s tenure, it is well past time for Yellen to address the situation. In particular, as an economist specialising in inequality and labour, Ms. Yellen must be especially distraught by the current status quo.
Neither article discusses what the Fed will or should do. On that front, we likely have key hints from the San Francisco Fed’s Williams and Vice Fed Chair Fischer pieces that we have covered extensively over the last few days. We should be attentive most of all to how Yellen views the Fed’s role for the longer term: if she underlines that the Fed will be reluctant to employ the tools that boosted bond and riusk asset markets in the past unless the coming administration launches a notable fiscal expansion, this could be seen as extremely negative for risk appetite and positive for the USD.
On the other hand, a very vague true-to-the-usual-form Yellen mentioning point and counterpoint on all of the issues dogging the US and global economy without a firm prescription for what this means for the future of the Fed’s policy stance could have the opposite effect and encourage another wave of USD selling. Our read is that it is time for Yellen to sound a bit more decisive and the market looks ill prepared for this.
USDJPY should be one of the more reactive currencies to Yellen’s speech today, as we watch for the 99.50/101.00 range to fall for the next trigger, even amidst the frustrating wait.
The G-10 rundown
USD – everything keying off Yellen’s speech today – one concern is that lack of short-term signals may be seized on for action, when the longer term implications of what she is saying are given short shrift – meaning we may not get the “correct” or decisive move today.
EUR – potentially somewhat lower beta here to the USD movements post Yellen than other USD pairs.
JPY – USDJPY action compressed (and spring-loaded) in the 99.50-101 range – as mentioned yesterday, even if Yellen and the September Bank of Japan don’t push the yen lower, we see less downside potential in USDJPY than upside potential for the longer run (focus on break lower is 94.60/95.00.
GBP – sterling perhaps the most sensitive to the risk appetite fallout (or boost) form Yellen’s speech today. 1.3250 area the key resistance for GBPUSD. Not seeing GDP release as relevant as an input as Q2 ended 7 days after the Brexit vote.
CHF – interesting to see EURCHF poking close to the range highs toward 1.0950 today – a move higher in interest rates likely need to pique interest in CHF trades – especially USDCHF post Yellen’s speech today.
AUD – Traders dithering in tight range – the key downside trigger is 0.7600/0.7575 in AUDUSD on the other side of Yellen today, while the upside bogs down in fresh resistance above 0.7800 if 0.7750 area falls.
CAD – we prefer USDCAD higher, but the pair has gotten thoroughly lost in the range, so awaiting developments below 1.2750 or above 1.3000/50.
NZD – bulls apparently champing at the bit at the top of the range, but if the Yellen speech chastens the yield chasers, this will be the currency most vulnerable to a steep correction.
SEK – EURSEK poking back toward tactical 9.50 area resistance after ugly confidence data.
NOK – EURNOK trigger areas look like 9.20 and 9.30/35 now, with oil prices a key factor.
Upcoming Economic Calendar Highlights (all times GMT)
- 0830 - UK Q2 GDP
- 1230 – US Q2 GDP revision
- 1400 – US Federal Reserve Chair Yellen to Speak at Jackson Hole
- 1400 – US Aug. Final University of Michigan Confidence
- 1450 – UK Bank of England’s Shafik to speak at Jackson Hole
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank