By Dean Popplewell
There's chatter in the market that Jackson Hole, beginning today, could be a currency event; another type of Plaza accord. Up until now, the market had been solely on the lookout for any hawkish comments from Fed Chair Janet Yellen's presentation at the Economic Symposium tomorrow to gauge timing of a change to the US' low interest rate policy. Maybe the Fed's agenda is about to expand?
The historic 1985 Plaza Accord, signed at the Plaza Hotel in New York City, was a pro-growth agreement signed by what was then known as the G-5 nations (US, UK, France, Japan and Germany) to depreciate the USD in relation to the JPY and German DEM. Central banks directly intervening in the currency market did this. Investors will be looking for any hawkish comments from Fed Chair Janet Yellen at the Jackson Hole Economic Symposium.
In between 1980 to 1985 the dollar had appreciated approximately +50% against the yen, pound, franc and deutsche mark, causing considerable difficulties for American industries and the economy as a whole. Back then; devaluing the dollar made U.S. exports attractive and more affordable for the signing partners. In turn, more US goods and services would be bought, giving the US economy a boost. This time, the focus is not on the US, but on Japan and specifically Europe, whose growth prospects continue to flounder or regress. Any colluded decision would require the EUR and JPY to depreciate against the USD. Both economies are in trouble, Europe more so especially with the knock on effect with EU/US/Russian sanctions.
If this does happen to hold true, then this would be a game changer for the forex market that has been handcuffed to central banks' low rate environment where the lack of volatility has been dominant. Expect the market to wait on every word that is been said in Wyoming.
Hawkish Fed supports dollar
The "mighty" buck trades atop of its 11-month high against a basket of major currencies this morning, gathering its second wind after yesterday's July FOMC minutes sounding "hawkish". The dollar index (DXY), still enjoying renewed support from Tuesday's upbeat U.S. housing data, climbed as far as +82.28, straddling a level not seen in 11-months. The FOMC minutes indicated that US policymakers debated on whether interest rates should be raised earlier given a surprisingly strong jobs market recovery. Most officials, however, wanted further evidence before changing their view on when rates should be lifted. Be aware, the continuous traction seen by the dollar is expected to come from a more hawkish tone from the Fed, but maybe not from Ms. Yellen directly when she addresses the annual Jackson Hole symposium tomorrow.
Weak China hits Aussie
Growth in China's (the world's second largest economy) vast factory sector slowed to a three-month low (50.3 vs. 51.5) this month as output and new orders moderated despite the recent burst of Government stimulus according to the private HSBC flash PMI index. The lukewarm reading came as China's economic growth appears to be faltering again, with recent indicators ranging from lending to output and investment all pointing to weakness. Psychologically, it remains above the coveted 50 prints that separate expansion from contraction. The softer conditions could imply that more stimuli may be needed in the coming months to bolster growth and offset the downdraft from the cooling housing market. The disappointing headline has caused a regional knock on effect - the AUD (China is Australia's largest trading partner). The Australian dollar slumped following the data, falling to $0.9246 from $0.9280. China's Shanghai Composite Index fell -0.4%, while Hong Kong's Hang Seng Index lost -0.4%.
Mixed Euro data has done little damage
Euro equity bourses are taking their cue from the US, where equities continue to rise despite the "hawkish" undertones from the Fed yesterday. Investors, it seems, remain comfortable that monetary policy will stay supportive for only game in town - stocks. Global inflation is fairly benign, and investors will only worry when rates do begin to move higher.
Euro PMI data this morning continues to show a slower than expected expansion in regional manufacturing and service activity again this month. The data continues its recent downturn, which saw economic growth stagnate in Q2 amid concerns that the Ukraine issues will hold back an already fragile economy.
The focus is always on Germany, the backbone of Europe. Germany's composite PMI (manufacturing and services) has come in at 54.9 vs. 55.7. Digging deeper, manufacturing has held up well (52 vs. 51.8 expected) while services have slipped (56.4 vs. 56.7). The only take away for investors is that the "ugly across the board weakness" was avoided, which the market had feared. The euro compound figure has fallen to 52.8 from 53.8, pressured mostly from a slipping manufacturing print (50.8 vs. 51.3). The data has managed to apply pressure to the EUR (€1.3261) and some tentative support for bunds (10-year bunds continue to trade below +1%). The data indicates that no recovery is taking root just yet, although Germany is showing some signs of improvement. It remains important to watch the prices component, they are still been cut - composite output prices fell to 48.9 vs. 49.
Sterling cannot hide
Other data released this morning shows that UK retail sales were weaker than expected in July (+0.1%, well below the expected +0.5% increase). The disappointing headline print may now take some of the pressure off Governor Carney to raise rates any time soon. Inflation data earlier this week also showed that UK price pressures were subdued. Yesterday's 7-2 MPC result is but a distant memory when GBP was trading above the £1.67 handle with some conviction. On the year, retail sales were up +2.6%, down nearly 1% from +3.4% in the 12-month through the end of June. For the time being, sterling has found a bid ahead of some option barriers (£1.6555) but should be weighed down by the "patchy" sales data.
The market will continue to be guided by the relatively hawkish minutes from the Fed, which should fuel further gains for the dollar, especially with the ECB likely to maintain its "ultra-loose" policy for some time. The ECB, and especially the vocal French, will be happy to see the EUR gaining traction in underperforming. It has taken awhile, but this year's patience trade (short EURs) is gathering much needed momentum.