INVESTORS LOCK GAZE ON POWELL’S SPEECH AT JACKSON HOLE
The dollar traded higher against all but two of the other G10 currencies on Thursday and during the Asian morning Friday. It notably underperformed against GBP, which surged again on Merkel’s remarks (see below), while it slid somewhat versus NZD. The greenback gained the most against SEK, NOK and CHF in that order.
The Kiwi was the second best performing G10 currency, coming under buying interest overnight after RBNZ Governor Adrian Orr said in a Bloomberg interview from Jackson Hole that the prior 50bps rate cut lowers the chances of having to do more later, and that QE is far from the Bank’s central scenario. Although at the press conference following the latest RBNZ gathering Orr said that the double cut does not rule out “further action”, his overnight remarks suggest that there is no urgency for policymakers to deliver another cut when they meet next. Indeed, according to New Zealand’s OIS, the probability for a 25bps reduction at the upcoming meeting, scheduled for September 25th, has declined to 18% from 30% yesterday.
In the equity world, the majority of major EU and US indices traded in the red, but today, most of the Asian ones sailed in positive waters. As we noted yesterday, it seems that investors are hesitant to assume a clear direction ahead of Fed Chair Powell’s speech at Jackson Hole, from whom they expect to get updated information with regards to the Fed's monetary policy plans.
At its latest meeting, the Committee decided to cut rates by 25bps, with Powell noting that the move was not the beginning of a long series of cuts, rather than a mid-cycle adjustment in policy. On Wednesday, the minutes of that meeting confirmed that view, but also showed that officials were more divided on the cut decision than the 8-2 vote suggested. However, that meeting took place just ahead of Trump’s threats with regards to tariffs on the remaining Chinese imports, with the latest round of trade tensions prompting investors to increase bets with regards to further easing by the Fed.
Yesterday, Philadelphia Fed President Patrick Harker and Kansas City President Esther George said that they don’t see the case for additional easing, but bearing in mind that Harker is not a voter within the Committee, and that George was one of the two dissenters in July, we prefer to wait for Powell’s remarks before we start assessing how the Fed may proceed forward. According to the Fed funds futures, currently there is a 90% chance for another cut to be delivered in September, while a third one is fully factored in by the end of the year. Thus, we believe that for the equities to resume their recovery and the dollar to slide, Powell’s remarks have to well satisfy market expectations. Anything suggesting that the Fed may ease less than the market currently implies could have the opposite effect, namely, stock indices and risk-linked currencies, like the Aussie and the Kiwi, are likely to fall, while the dollar and the safe-havens yen and franc could come under buying interest.
As for what we believe, we see the latter case as more likely. Yes, Powell may indeed sound more dovish compared to the meeting conference, due to the escalating trade tensions between US and China since then. However, he may also want to prove that the Fed’s independence is not compromised by US President Trump’s attacks. Remember that on Monday, Trump said that the Fed should consider removing 100bps from interest rates. Thus, we expect him to keep the prospect of another cut on the table, perhaps in September as the market prices in, but we don’t expect him to signal that more reductions are underway. We believe that he may stick to his “mid-cycle policy adjustment” rhetoric.
AUD/USD – TECHNICAL OUTLOOK
AUD/USD traded south yesterday, after it hit resistance near 0.6797 on Wednesday. That said, the slide was stopped today during the Asian trading, near the 0.6745 zone. Overall, the pair has been trading in a sideways mode since August 8th, between that support and the resistance of 0.6820, thus, we would take a neutral stance at the moment, although the rate appears to be flirting with the lower end of the range.
We prefer to wait for a dip below 0.6745 before we get confident on a decent leg to the downside. This would signal the downside exit out of the aforementioned range and may be the result of less-dovish-than-expected remarks by Fed Chief Powell at the Jackson Hole today. Such a dip may set the stage for bearish extensions towards the low of August 7th, at around 0.6677, which is also the lowest point since March 2009.
Shifting attention to our short-term oscillators, we see that the RSI is below 50 and points down, while the MACD lies below both its zero and trigger lines, pointing south as well. These indicators detect downside momentum and enhance the case for a dip below 0.6745 if Powell does not satisfy the overly dovish market expectations.
On the upside, we would like to see a clear recovery above 0.6820 before we start assessing whether the short-term picture has turned brighter. Such a move could signal the upside exit out of the pre-discussed range and may encourage advances towards 0.6870, which is the high of August 1st. Another move, above 0.6870, could give the green light for the bulls to push towards the 0.6900 zone, slightly above the peak of the day before.
GBP-TRADERS CHEER MERKEL’S COMMENTS AGAIN
The pound was found as the main gainer this morning, skyrocketing after German Chancellor Merkel said that her comments on Tuesday over a solution with regards to the Irish backstop in 30 days were meant to highlight urgency and not a strict deadline. “I said that what one can achieve in three or two years can also be achieved in 30 days. Better said, one must say that one can also achieve it by October 31st,” the Chancellor noted.
Cable surged around 120 pips on Merkel’s remarks, to hit resistance at around 1.2270 before settling somewhat lower. In our view, this shows how pessimistic market participants were over the Brexit saga that any headlines or hints suggesting willingness to avert a disorderly exit, trigger pound spikes. Even French President Emmanuel Macron left the door open for a solution over the backstop, saying that it has to be found within a month. That said, he also noted that there is not enough time to negotiate a wholly new Brexit deal. UK PM Johnson, who has pledged to leave the EU by October 31st with or without a deal, told Macron that he was confident a deal can be reached ahead of that deadline. “Let’s get Brexit done, let’s get it done sensibly and pragmatically and in the interests of both sides and let’s not wait until October 31st,” the UK PM said.
As for our view, softer remarks by both sides are likely to continue being more-than-welcome by GBP-traders, who had been selling pounds on fears that Johnson will pull the plug without any agreed accord. That said, although the pound could continue gaining for a while more, we are still reluctant to believe that this is the beginning of a long-lasting recovery. In order to start getting confident on that front we would like to see actions, negotiations and concrete efforts to reach common ground. At the moment, we are at the stage of comments, remarks and goodwill, which we think it is far from suggesting that a no-deal Brexit has been taken out of the equation.
GBP/CAD – TECHNICAL OUTLOOK
GBP/CAD skyrocketed yesterday following German Chancellor Merkel’s Brexit comments, breaking above the downside resistance line drawn from the peak of June 3rd, as well as above the resistance (now turned into support) obstacles of 1.6230 and 1.6255. This, combined with the fact that the rate is also trading above a short-term upside support line taken from the low of August 9th, has turned the short-term outlook to somewhat positive in our view.
If the bulls are willing to retake the reins soon and manage to overcome the 1.6320 resistance territory, we would expect them to push the battle towards the 1.6440 area, which is defined as a resistance by the highs of July 24th and 25th. The rate may stall around there or correct a bit lower, but as long as it stays above both the aforementioned diagonal lines, we would see a decent chance for the bulls to enter back into the game and trigger another positive leg. A clear and decisive break above 1.6440 may result in extensions towards the 1.6545 area, marked by the inside swing low of July 1st.
That said, our short-term oscillators suggest that a minor setback may be looming from current levels before the next possible rebound. The RSI hit resistance at its 70 line and then it flattened, while the MACD, although above both its zero and trigger lines, has started to slow down.
On the downside, we would like to see a clear dip below 1.6030 before we start examining whether the bears have gained back the upper hand. Such a move would also bring the rate below both the prior downside and the recent upside lines, and may see scope for extensions towards the 1.5925 area, which is near the lows of August 13th and 14th. Another dip, below 1.5925, could extend the slide a bit more, perhaps towards the low of August 9th, at around 1.5875.
AS FOR THE REST OF TODAY’S EVENTS
Besides Powell’s speech at Jackson Hole, the rest of today’s agenda appears to be light with the only indicators worth mentioning being the US new home sales for July and Canada’s retail sales for June. The US new home sales are expected to have declined 0.2% mom after rising 7.0% in June, while both Canada’s headline and core retail sales are anticipated to have slid 0.1% mom, after falling 0.1% and 0.3% respectively.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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