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All eyes on Jackson Hole
Jackson Hole could surprise
After much hype, the annual Jackson Hole Economic Symposium is finally here. The highlight of the two day even will clearly be scheduled speeches by Fed Chair Yellen and ECB President Draghi (Aug 25th). Fed Chair Yellen expected to discuss “Financial Stability” which is likely to include views on current easing financial conditions. Perhaps it’s the summer heat but the market remains blasé in not expected anything new from Yellen. However, Jackson Hole does have reputation for market moving events. Remember Draghi’s game changing comment “whatever it takes to preserve the euro“. The FOMC minutes indicate the Fed is heading toward balance sheet reduction before rate hike. While balance sheet reduction are less supportive of USD we still expect a noticeable uptick as details and execution emerge.
It is possible judging from recent FOMC minutes at Yellen might argue that an increase in short-term interest rates will help support financial stability. Even if inflation outlook remains subdued (remaining view of transitory factors). In our view, confident Fed message in this direction should be viewed as hawkish and supports a rally in USD. From our perspective the markets is under-pricing Fed rate path due to recent softness in economic data and further concerns over trumps administration ability to achieve policy goals. Fed rate hikes market are pricing in a merger 40% probability of 25bp 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. In regards to Draghi we suspect he will let Yellen steer the conversations since hints on ECB monetary policy drives Euro bulls. ECB July meeting minutes revealed that members are worried about the risk of exchange rate overshoot.
Upside surprise in NZ trade balance fails to boost NZD
New Zealand’s trade balance surprised to the upside in July as it rose to NZ$85m, while economists expected a deficit of NZ$200. This is the first time since 2012 that the country reports a trade surplus for the month of July. The good news came on the back of an unexpected increase in dairy exports, which jumped 51% to NZ$1.27bn. Overall, exports rose 17%y/y or NZ$668 million to reach NZ$4.63 billion. Imports were up NZ$232 (+5.4%y/y) amid sharp increase in vehicles, part and accessories imports (+15%y/y).
The unexpected surged in exports is particularly surprising as the Kiwie has been appreciating substantially since the beginning and reached 0.7558 at the end of July, its highest level against the greenback since May 2015.
In the FX market, the lack of reaction by traders showed that the rally that send NZD/USD to 0.72 wasn’t driven by local economic developments but rather by the investors’ appetite for higher yields. Indeed, both the Kiwi and the Aussie were in high during the summer month as the Federal Reserve prolonged the suspense about the future of its monetary policy.
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 MA). We remain bearish Kiwie - and Aussie- as we expect investors will slowly start to reload long USD position ahead of September FOMC meeting.