Global stocks and the dollar staged a solid rebound yesterday as a lack of adverse political developments in Washington and the continued lull in the stand-off between the US and North Korea encouraged a more “risk-on” stance among participants.
Emerging market equities were beneficiaries of the improved mood, with the MSCI EM index climbing back towards a three-year high. The gains came in spite of concerns that this week’s Jackson Hole gathering of central bankers might deliver hints on the timing of European Central Bank asset purchase tapering and Federal Reserve balance sheet “normalisation”.
Viraj Patel, foreign exchange strategist at ING, said this Friday’s speech by Ms Yellen was likely to be a non-event but could yet surprise investors and push the dollar higher. “If chair Yellen does allude to a steeper Fed tightening path, then not only would short-term US rates and the dollar move higher, but there is only one direction for risky assets, and that is down,” he said. “This is certainly the case if US or global politics also continues to weigh on broader risk sentiment in the near term.”
After tightening policy three times in quarter-percentage point increments since December, bond traders are pricing in less than a 50 per cent chance of another shift higher in overnight borrowing costs this year. A modest tightening cycle has failed to sustain the dollar, which peaked at the start of the year.
Meanwhile, there was increasing scepticism among market observers that Jackson Hole would actually provide much in the way of fresh insight on the outlook for monetary policy in either the US or the Eurozone.
Steve Barrow, head of G10 strategy at Standard Bank, noted that the title of the symposium was “Fostering a Dynamic Global Economy”. “The problem with this title in our view is that it’s not really a monetary policy subject at all,” he said.
“Last week alleged ‘sources’ made it clear that ECB head Mario Draghi would not provide any new insights into the ECB’s thinking on monetary policy and will, instead, speak to the theme of the conference.”
Jim Reid, strategist at Deutsche Bank, said that investors were much more set up for a non-event at Jackson Hole than they were a month or two ago. “That likely implies that a non-event or dovish comments will have limited impact on the market whereas evidence of tighter policy relative to expectations from either could lead to a bigger reaction.” He added: “Don’t forget Mr Draghi’s speech at the Lindau symposium in Germany today. “If he is going to say something market moving this week, it might be there rather than stateside.”
The currency market will focus on remarks from Mario Draghi, European Central Bank president, who speaks after Ms. Yellen on Friday at the Jackson Hole gathering. Traders have noted recent concerns among ECB officials that the euro’s stellar run for much of this year is tightening financial conditions for the region.
Elsewhere analysts noted recent reports that Silvio Berlusconi, the country’s former prime minister and leader of the centre-right Forza Italia party, had indicated support for the introduction of a parallel currency in Italy. While the idea was not new, it could gain greater traction given that Italy is due to hold elections next year. Citi said its analysis of the election implied that more than two-thirds of Italian voters currently support parties with an anti-euro stance.
Hong Kong’s stock exchange was closed for the day today as Typhoon Hato bore down on the territory.
The Hong Kong dollar was again flirting with a decade low against its US counterpart, as it weakened fractionally to HK$7.8264 two weeks after the city’s de facto central bank moved to shore up the currency. The New Zealand dollar was the worst performer in the region, off as much as 0.7 per cent at $0.7232 after the New Zealand Treasury lowered its growth estimate for the year to June to 3.5 per cent from 3.7 per cent. The Australian dollar was down as well, dropping as much as 0.4 per cent to $0.7883, on track for a second day of losses as it pulls back from the psychologically significant threshold of $0.80.
EUR/USD opened in Asia at $1.1760 towards the lower end of Tuesday’s range. We began the session on the front foot, rising to today’s high of $1.1766, before falling to today’s low of $1.1747. The pair found support as the session wore on, with the market trading around the unchanged line at $1.1761. From a technical view, Monday’s low at low at $1.1729 and Friday’s low at $1.1705 may offer support while on the upside we look for Monday’s highs at $1.1828 and the August 11th highs at $1.1846.
Cable opened in Asia at $1.2820 towards the lower end of Tuesday’s range. We began the session on the front foot, rising to today’s high of $1.2828. The pair came under pressure as the session wore on, falling to today’s low of $1.2804. The market has eased off the lows as we approach the European open, trading around the unchanged line at $1.2824. The overnight low at $1.1204 forms out first support level, below which we target the June 28th low at $1.2790. On the upside, Monday’s high at $1.2916 and the August 11th low at $1.2937 are in focus.
USD/JPY opened in Asia at ¥109.54 towards the upper end of Tuesday’s range. We began the session on the front foot, rising to today’s high of ¥109.79. The pair came under pressure as the session wore as markets reacted to US President Trump’s comments at a rally in Arizona. Speaking on the proposed border wall between the US and Mexico, Trump said we are building that wall, even if we have to close down government. Trump’s remarks on a government shutdown saw the pair fall to today’s low of ¥109.34 as perceived safe-havens bounced higher. Trump also mentioned that at some point the US will probably end up terminating NAFTA. The market has eased off the lows as we approach the European open, trading at ¥109.46. From a technical view, yesterday’s low of ¥108.86 forms our first support level, ahead of Friday’s low of ¥108.61. On the upside, Friday’s high at ¥109.59 and last Wednesday’s low at ¥110.00 are in focus.
GBP/EUR opened in Asia at €1.0900 towards the lower end of Tuesday’s range. We began the session on the front foot, rising to today’s high of €1.0904. The pair came under pressure as the session wore on, falling to today’s low of €1.0894. The market is back up around the highs as we approach the European open, trading at €1.0901. From a technical view, the overnight low of €1.0894 may offer some support before the October 29th (2009) low of €1.0818 followed by the October 15th (2009) low at €1.0704. On the upside, Monday’s high at €1.0975 and Friday’s high at $1.0998 are in focus.