Fed Dudley: A precursor to Jackson Hole?
The markets continue to recover from last week’s disorder as US equities orchestrated a splendid showing recouping some of the sharp losses from last Friday as investor confidence returns with the de escalation of North Korea tension.
Dollar Yen bulls are smiling this morning in the wake of Fed Bill Dudley interview with the Associated Press where he was unabashedly hawkish. In what may be a precursor to Jackson Hole, the powerful New York Federal Reserve President believes the Fed’s balance-sheet reduction plan will begin in September and he is still confident of another rate hike this year. But realistically given how slight the markets 2017 rate hike expectations are, how much more bearishness could the FX markets price into the equation?
Oil markets leaked 2 % overnight on the back of weak China data and a stronger greenback. Commodity markets have been on edge since last week’s softer mainland trade data, so the sharp fall in CNY Industrial output will continue to weigh negatively on commodity markets as this is a clear sign that growth momentum in the world’s second largest economy is slowing.
Australian Dollar
The stronger USD and weaker China data have set the sagging tone for the Aussie dollar overnight ahead of today Monetary Policy Meeting Minutes. The weaker China data prints indicate the People’s Bank of China (PBOC ) cooling measures have the impact that economists predicted since the PBOC moved to deleverage.With commodity risk sentiment teetering, selling into commodity currency rallies will remain in vogue, and with base metals falling under renewed pressure, the Aussie will be the preferred short on this view.
Also weighing on regional sentiment President Donald Trump has set the wheels in motion for a US trade investigation of China’s intellectual property policies and, potentially, new tariffs on Chinese imports.
RBA Meeting Minutes revealed little change in the RBA’s view but the Aussie dollar is finding some support in morning trade on the back of improving risk sentiment.
Japanese Yen
A report published this morning stating that North Korea is backing off military escalation is adding more momentum to the haven trade unwind that began yesterday and coupled with some timely Fed speak, USDJPY moved through 110 with little opposition. External factors will continue to drive sentiment, with a more confident sounding Fed and risk sentiment rebounding, it would suggest there is room for USDJPY to extend the current rally over the days ahead. However, keep August 21-31 circled as South Korea & the US’s joint annual military exercise begins. With satellite photos suggested that North Korea seems to be preparing a new submarine launched ballistic missile, I suspect the markets will get testy again.
Euro
The market continues to re-engage the long EUR trade, this market darling is not about to give way anytime soon. It’s going to action not Fed rhetoric to shift the buy on dip sentiment
