Yellen steps forward while Draghi steps back won't favor the Euro-Dollar

Yellen was not so dovish in Jackson Hole last Friday. The message that she conveyed had probably disappointed the doves, as those sentences such as “no simple receipt”, and “difficult to judge the degree of slack” clearly signalled that Yellen’s stance is shifting from where she was few months ago. Overall, this speech itself was in a pretty “balanced tone”, as spread between 2/10 notes continues to narrow down after the speech tells an unclear outlook on inflation, which can be a good reason for Yellen to keep the rates low.

Now, Fed needs to communicate with the market on its exit strategy. This includes topics like, if the data continues to remain healthy, and it could start as early as next month in the Federal Open Market Committee (FOMC) meeting. Federal Reserve (Fed) doesn't prefer a sharp rise of the volatility all of the time. Based on the recent FOMC minutes, it expressed that there is an increasing soreto keep the rates low for a longer time. If the rates remain unchanged when the inflation and labour market improve substantially, this will jeopardize Yellen’schange to her dovish stance much more quickly later, leading to a spike of the borrowing cost.

Dollar’s long term uptrend is far from ending as long as the first rate-hike expectation is well anchored. Most importantly, the divergent growths around the world are forcing the central banks to adopt different monetary policies, while the U.S. recovery is one of the best in the major economies. But still the pace of “Dollar Bull” will be very gradual as you can’t underestimate the patience that the Fed has.

China is also one of key drivers in the global economy. The recent soft patch of the data should not bring the immediate attention from the officials although we do not think that the officials will shift the growth target this year. Lending in August looks to recover as the soft credit in July was not due to People’s Bank of China (PBOC)’s tightening, the easing on properties’ purchasing restriction are expanding. Overall, we do not expect any immediate policy response from the officials unless the broad economic condition fell further and treat the 3Q growth falling below 7.4%.

The direction of the Yuan could very much depend on the determination of the PBOC’s needs to intervene. A stronger yuan certainly does not favour its economy when the domestic demand and infrastructures investment slack. They need more revenue from their exports.

However, the Fed could influence a more market based Yuan to go higher. We still tend to believe the Fed will contain the curve flattering, thus the widening spread between the two could limit the downside room of the Yuan.

As for the domestic Equities market, there is no real driver at the moment, and we still think the momentum is short-lived. “A share” market is highly driven by the “news hype” which is not new to us. Now the Shanghai-HK shares’ premium has been largely narrowed on the Shanghai HK stock connect, further gain will return to the fundamentals and policies.

Structural reform has been very invisible so far when the domestic demand remains weak. The easing on monetary policy without a broad base is only to prevent from a crisis era, but not to support a major growth.

In the euro zone, recent measures have yet to transmit into the economy. Impact from the Russian Sanction should not be valid, as even German’s exports to Russia only accounts for 3% to its entire exports.

Economic data falls broadly, and there is a likelihood of another falling inflation this week, it looks more real now that the European Central Bank(ECB) needs to prepare the framework for further easing measures, otherwise deflation risk or even debts default to emerge will visit the euro area soon when there is a threat of recession.

Our view on the euro-dollar remains negative despite the fact that it isclose to a 12-month low. We do not see any visible evidence so far that the currency bloc can recover itself from the existing measures. Mario Draghi’s inflation outlook appeared to be more negative in Jackson Hole, which may further increase the bets on Quantitative easing (QE). If not, the worsening condition will not favour the Euro. When Draghi is motivated to take one step back but it is one step forward for Yellen, which means the euro-dollar doesn’t look positive.