Jackson Hole to boost USD and maybe interest-rates in short-term
By Peter Rosenstreich
Markets are underestimating upcoming comments from US Federal Reserve Chair Janet Yellen, who will speak at a monetary policy conference held today (Thursday) and Friday in Jackson Hole, Wyoming. We suspect Yellen will give some detail on how the Fed plans to unwind its balance sheet. Although technically, this should weaken the dollar, we believe this show of resolve to return to ‘normalcy’ will boost the greenback. Indeed, Yellen might go so far as to argue that an increase in short-term interest rates will help support financial stability.
A confident Fed message in this direction should be viewed as hawkish and will rally the USD. The markets are under-pricing this, focusing more on recent, soft economic data and concerns about the Trump Administration’s ability to set policy. Fed rate hikes market are pricing in a merger 40% probability of 25 basis points for 2017. A repricing will send short term yields higher (US 2-yr yields at 1.31%) and likely catch the markets flatfooted. Low yielding G10 currencies are particularly susceptible to a rise in US yields.
European Central Bank President Mario Draghi will also speak at Jackson Hole. We think he will defer to Yellen and not make any major statements.
Upside surprise in NZ trade balance fails to boost NZD: bearish trend remains
By Arnaud Masset
We remain bearish on the New Zealand dollar, as we expect investors to reload long USD positions ahead of the US Federal Reserve’s Open Market Committee meeting in September.
Our view was confirmed by the markets’ lack of reaction to a recent New Zealand export surplus. Its trade balance surprised to the upside in July as it rose to NZ$ 85 million, while economists expected a deficit of NZ$ 200. This, the first July trade surplus since 2012, came on the back of an unexpected increase in dairy exports, which jumped 51% to NZ$1.27 billion. Overall, exports rose 17% year on year to NZ$ 4.63 billion. The surge in exports is particularly surprising, as the Kiwi has been appreciating substantially, reaching 0.7558 USD at the end of July, its highest level against the greenback since May 2015.
But the lack of reaction by traders to the surplus showed investors are less driven by trade than by yields. Over the last three weeks, NZD/USD has broken several supports and is currently testing the key 0.7188 level (Fibonacci 50% on May-July rally). If broken the following one stands at 0.71 (Fibo 61.8% and psychological level), while on the upside a resistance lies at around 0.7330 (50-day moving average).