A Jackson Hole lotta nothin’
FX Consultant / IFXA Ltd
- Jackson Hole Symposium may be over-hyped
- Is the Canadian election campaign providing drama?
- Month end Monday may be volatile
By Michael O’Neill
This year’s version of the Jackson Hole Symposium, a Davos-lite for Central Bankers, Finance Ministers etc., is being elevated to a level of importance usually reserved for Sermons on the Mount. Pundits are predicting market moving insights from the likes of Bank of England (BoE) governor Mark Carney and Federal Reserve vice chairman, Stanley Fischer.
This may be merely a case of wishful thinking. Someone, somewhere opined that the Symposium would be the ideal vehicle for senior Central Bankers to soothe jittery nerves in the light of this week’s equity market turmoil.
A shiny emperor. But what about his new clothes? Photo: iStock
That thought has appealed to a large number of people especially those caught up in this week’s equity debacle. Many are looking to Mr. Fischer to provide clearer signals as to the timing of a rate hike while Mr. Carney may use the forum to ignite UK rate hike chatter.
Unfortunately, it is more likely to be an Emperor’s new clothes event. People will see (or hear) what they want right up until reality hits them between the eyes. Mr. Fischer will remain vague. The Fed has gone to great lengths to tell markets that rate moves are data dependent. With the key nonfarm payrolls release not until next Friday, it doesn’t make any sense for Mr. Fischer to outline a course of action this weekend.
Canadian election drama
There is drama building in the Canadian election campaign but not the drama that you would expect. It is more of the educational variety, more specifically, a former drama teacher and leader of the Liberal party, Justin Trudeau, has declared he would run a $10 billion deficit for the next 3 years as part of a decade long plan to spend $125 billion in infrastructure spending in order to grow the economy.
This is the same tactic that a succession of Liberal governments have employed and the only economic growth is, according to a Fraser Institute report, a 1,366% rise in taxes since 1961. Today, a Canadian family earning $79,010 spends 42% of income on tax. Brother, can ya spare $10 billion!
Talking of building and running massive deficits would be a spicy batter on the Loonie which is already being deep-fried by low oil prices.
Canadian dollar outlook:
Oil prices continue to be the main driver of USDCAD direction although yesterday’s Liberal Party announcement advocating new and massive budget deficits isn’t helping matters. WTI has had a healthy bounce after hitting a low of $37.85/b on Monday.
However, the rally stalled on the downtrend line from July (at $43.50/b) and oil has retreated. Interestingly, USDCAD has failed to participate in this latest bout of oil strength.
One possible explanation is that month end portfolio rebalancing flows are expected to result in USD demand. In addition, Canadian dollar sentiment is negative. China’s economy appears to be slowing faster than expected and oil prices are expected to remain low for longer.
Some start smiling when looking at the recent soar in oil prices. Photo: iStock
The up-then-down pattern of Canadian employment reports this year, suggests that next Friday’s release will show Canada lost jobs. That will fuel USDCAD buying, doubly so, if the US NFP report beats expectations.
Tuesday’s GDP report may post another negative number which if it does, would be the sixth consecutive month. Technical recession or not, a negative number will crush the Canadian dollar.
USDCAD technical outlook
The USDCAD technicals are bullish, both intraday and short term. This morning’s move back through the intraday downtrend line at 1.3240, has refocused the spotlight on this week’s 1.3350 high while 1.3450 is lurking just behind.
A failure to extend gains above 1.3350 should lead to a retest of support in the 1.3140-60 area. A move below 1.3140 would argue that a short term top is in place and risk further declines to 1.3000
For the week ahead, USDCAD support will be at 1.3190 and 1.3140. Resistance will be at 1.3305, 1.3350 and 1.3450.
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more
The week that was
This week had everything. Blind “get-me-out” panic selling of equities roiled FX markets, particularly euro and yen, at the beginning of the week which faded to an “Alka-Seltzer” moment by Thursday. (plop, plop, fizz, fizz; Oh, what a relief it is). In between, a lot of money changed hands.
Monday saw China’s equity market woes spread like a plague. The Shanghai Composite Index (SHCOMP) dropped 8.6%, a nasty move that rippled around the globe. S&P futures went limit down, warning of a 5% drop at the New York open. Kiwi got squished; plummeting from 0.6570 to 0.6208. Liquidity didn’t completely evaporate but at times it was harder to find than rain in California.
The panic subsided during Tuesday’s Asian and European sessions, but not the volatility with traders complaining about poor liquidity. G-7 currencies traded in wide bands and oil price sentiment remained negative.
Once again, the SHCOMP was down, this time 7.6% and official China seemed to have gone into hiding. Later on, official China emerged from their spider holes and took action. The Peoples Bank of China (PBoC) cut the Reserve Requirement and the 1 year benchmark lending rate.
The action was seen as too little, too late. A rally in the S&P in the New York morning turned to a loss by the close. The day ended with markets worried about further losses and speculating about reaction from the Fed.
Rushing to trade stocks? Photo: iStock
Wednesday was an oasis of tranquility, at least compared to Monday and Tuesday. The SHCOMP gained 3% and set the tone for North American markets which also closed with large gains. US Durable Goods delivered a much better-than-expected result, yet G-7 currencies appeared unimpressed.
The end of week/weekend, Jackson Hole Symposium started attracting attention in hopes that the Fed Vice Chair Stanley Fisher would shed some light on how the equity market movements would affect the FOMC rate decision.
Thursday, a degree of normalcy descended over markets. Crude oil rebounded 4% and European equity markets climbed. US data was strong. Jobless claims fell to 271,000 and 2Q GDP handily beat forecasts. For an FOMC that says rate moves are “data dependent”, this GDP data could make a compelling case to hike rates in September.
The week that will be
The week that just ended will be a tough act to follow but the coming week may be up to the challenge. The equity market meltdowns of last week will still be fresh memories which may cause outsized currency reactions if global indices start to decline. More than likely, the week will start and end with a bang.
On Monday, there may be big moves in G-7 currencies due to month end portfolio rebalancing flows, which may be larger than usual due to the equity market declines. On Friday, US and Canadian employment reports should cause some fireworks.
In between, the Reserve Bank of Australia and the European Central Bank rate decisions and statements will be closely monitored to see what, if any affect, the equity market turmoil has on these central banks’ outlooks.
– Edited by Clemens Bomsdorf