Jackson Hole comments show little change in FOMC views

• The Fed held its annual symposium in Jackson Hole, Wyoming over the weekend. Comments from officials there suggest that the members of the FOMC haven’t much changed their views on the economy and the appropriate course of interest rates despite the volatility in the markets recently. St. Louis Fed President James Bullard said the recent market volatility hadn’t changed his outlook very much. Bullard though is known to be in favor of raising rates in September and so could be expected to rationalize away the volatility. But even the extremely dovish Narayana Kocherlakota, Minneapolis Fed President (and no longer FOMC member), said the market turmoil shouldn’t cause a change in the outlook. These views from the US were echoed by Bank of England Gov. Carney, who said “developments in China are unlikely to change the process of rate increases” than that “recent events do not yet, to my mind, merit changing the MPC’s strategy for returning inflation to target.”

• The most widely noted comments were from Fed Vice Chairman Stanley Fischer, who said on Saturday that “(t)here is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” That was taken as an indication that he believes September is still a possibility. Much will depend on Friday’s nonfarm payroll figure.

• I believe that these comments are positive for both the USD and GBP. Some doubts about tightening probably crept into investors’ minds recently as they saw the turmoil in markets, but those doubts may well be calmed by this weekend’s comments. Nonetheless, the September and December Fed funds futures contracts were unchanged. The market is now placing a 38% chance of a rate hike in September, up from 24% in the middle of last week.
  
  
  

• What we’ve learned from recent market activity is that EUR and JPY are being actively used as a funding currency. When investors close out long positions in stocks, they also close out their short positions in the currency that they used to fund those positions, namely EUR and JPY. Thus as confidence returns to the markets, it should also return to the short-EUR and short-JPY trades.

• Initial polls show SYRIZA lagging: Campaigning formally began over the weekend for the 20 Sept. Parliamentary elections. The initial polls show former PM Alexis Tsipras’s SYRIZA coalition in the lead, but without enough support to command a majority in Parliament. The prospect of difficult coalition talks could hinder the government in implementing the conditions set out for the country’s third bailout and endanger the financial rescue. I don’t think this issue is an immediate threat to the euro. First off, there are several weeks to go before the election, and as we saw twice in the UK this year, markets don’t get that excited about elections until they are almost upon us. Secondly, peoples’ opinions can change dramatically in three weeks. Finally, Greece is no longer investors’ major concern; China is. However, this issue could return to the euro’s detriment following the elections.

• This morning’s indicators: During the Asian day Monday, Japan’s preliminary industrial production for July fell on a mom basis instead of rising slightly as was expected. Not encouraging! But as usual, USD/JPY followed Tokyo stock prices, not economic logic, which means the pair went lower (i.e., JPY strengthened). New Zealand’s ANZ business confidence for August also fell sharply, adding to expectations of a rate cut by the RBNZ at its policy meeting Sep. 10th. NZD/USD weakened sharply on the news, as was to be expected. Further weakening may be possible tomorrow, when the official China manufacturing PMI comes out (see below).

• Today’s indicators: During the European day, Eurozone’s flash CPI for July is coming out. The forecast is for an unchanged reading, and following the unchanged German inflation rate on Friday, the likelihood that the bloc’s CPI will meet the forecast is high. Any disappointment ahead of the ECB meeting could add to expectations that the Bank will have to keep QE in place for longer, which could put EUR under selling pressure.

• From the US, only secondary importance data are to be released. The Chicago Purchasing managers’ index for August is coming out.

• Today is a bank holiday in the UK. Markets are closed.

• As for the rest of the week, we have a very eventful week ahead of us with several central bank meetings, important economic indicators, and of course, Friday’s US employment report.

• On Tuesday, the RBA meets to decide on its benchmark interest rate. At their last meeting, Bank officials kept the policy rate unchanged, but for the first time since March 2014 they didn’t explicitly mentioned that the currency was overvalued and they removed the phrase that “further fall in AUD is likely and necessary.” Although the recent turmoil in China has increased the possibility of a rate cut this week, we believe that the Bank will remain on hold again and wait to better assess the effects of the Chinese chaos on Australia’s economy before they decide to act.

• From Canada, the monthly GDP for June and the Q2 GDP figure are due out. The monthly figure is expected to accelerate, but not enough for Q2 GDP as a whole to improve, as it is expected to fall further and put the country in a technical recession. It looks like the effects of falling commodities prices on the Canadian economy are not going to fade out anytime soon. The renewed slump in oil prices is likely to put further downside pressure on CAD and BoC could act again to underpin the fragile economy. A weak quarterly growth rate could push CAD lower.

• Globally, the monthly Purchasing Manufacturers’ indices (PMIs) for August begin coming out on Tuesday, starting as usual with China’s official PMI. It’s expected to fall below 50 again for the first time since February, which is not likely to encourage anyone. AUD and NZD are most at risk from this number, and if general risk aversion results, it could boost EUR and JPY.

• On Wednesday, the US ADP employment report for August is coming out two days ahead of the nonfarm payroll release, as usual. The ADP report is expected to show a print above the crucial 200k level and that the private sector gained more jobs in August than it did in the previous month. With just few weeks before Fed’s September meeting, further improvement in the labor market could be the additional information Fed members need for a rate hike to become “compelling”.

• On Thursday, all eyes will be on the ECB meeting. Following the Jackson Hole Symposium, ECB President Draghi will be the first major central banker to address a monetary policy meeting. Both the BoE and the Fed will meet later this month. Last Tuesday, ECB Vice President Vitor Constancio said that it is too early for the ECB to react to China’s situation as it is not clear how it would impact Eurozone’s economy. We agree with him and we do not expect the Bank to take any action at this meeting. We expect it to reiterate its easing bias and once again to stress its readiness to use all instruments within its mandate to defend new downside risks to price stability. We expect the ECB to leave the door open for a possible action and will look for hints on what possible actions they could take, such as increasing the size of the monthly allotment or extending the duration of the QE program. Sweden’s Riksbank also meets Thursday. They are expected to keep rates on hold, so the focus will be on the outlook that they present and their bias for future moves.

• On Friday, the main event will be the US employment report for August. This would be the most important employment report of the year, in our view, since it’s the last one ahead of the September FOMC policy meeting. The report is expected to show a 218k increase in nonfarm payrolls, slightly above the 215k print in July. Another reading above 200k would suggest that the US labor market is still gathering momentum despite the recent turmoil in China and the collapse in equity markets worldwide. The US unemployment rate is forecast to have remained unchanged at 5.3% while growth in average hourly earnings is expected to slow somewhat, to 2.0% yoy from 2.1% yoy.

The Market

EUR/USD hits support near 1.1165

• EUR/USD hit resistance at 1.1310 (R1) on Friday and tumbled to find support at 1.1165 (S1). Subsequently, the rate rebounded. The short-term trend remains negative in my view and therefore I would expect a clear break below 1.1165 (S1) to initially aim for the next support at 1.1110 (S2). Our momentum studies though give evidence that the current rebound may continue for a while before the bears decide to shoot again, perhaps for another test at the 1.1310 (R1) resistance. The RSI, although below 50, has turned up again, while the MACD has bottomed and could cross above its trigger line soon. As for the broader trend, given that on the 26th of August, EUR/USD fell back below 1.1500 (R3), I would hold my neutral stance. The move below that psychological hurdle confirmed that the surge on the 24th of the month was a false break out. Therefore, I would like to see another move above 1.1500 (R3) before assuming that the overall outlook is back to positive.

• Support: 1.1165 (S1), 1.1110 (S2), 1.1020 (S3)

• Resistance: 1.1310 (R1), 1.1400 (R2), 1.1500 (R3)

GBP/USD rebounds from fractionally above 1.5330

• GBP/USD continued trading lower on Friday, but hit support fractionally above the 1.5330 (S2) support defined by the low of the 8th of July and then rebounded. Although the price structure on the 4-hour chart suggests a short-term downtrend, I would expect the current rebound to continue. A break above 1.5450 (R1) would confirm the case and perhaps pave the way for another test at the psychological zone of 1.5500 (R2). Our short – term oscillators corroborate my view as well. The RSI exited its below-30 zone and is now pointing up, while the MACD, although negative, has bottomed and has just crossed above its trigger line. As for the bigger picture, the collapse on the 26th of August brought the rate back below the 80-day exponential moving average. As a result, I would maintain my neutral view as far as the overall outlook of Cable is concerned.

• Support: 1.5370 (S1), 1.5330 (S2), 1.5270 (S3)

• Resistance: 1.5450 (R1), 1.5500 (R2), 1.5540 (R3)

USD/JPY hits resistance at 121.75

• USD/JPY traded higher on Friday, but hit resistance at 121.75 (R1) and then retreated. The price structure on the 4-hour chart still suggests a short-term uptrend. As a result, I would expect a break above 121.75 (R1) to open the way for our next resistance at 122.40 (R2). Nevertheless, our momentum studies support the view that the current retreat may continue for a while before buyers pull the trigger, perhaps for another test at the 120.65 (S1) support. The RSI turned down and could fall below its 50 line soon, while the MACD, although positive, shows signs of topping. As for the broader trend, the plunge on the 24th of August signaled the completion of a possible double top formation, which probably shifted the medium-term picture negative. As a result, I would treat the near-term trend as a corrective phase for now.

• Support: 120.65 (S1), 119.80 (S2), 118.90 (S3)

• Resistance: 121.75 (R1), 122.40 (R2), 123.00 (R3)

WTI hits resistance slightly below 46.00

• WTI shot up on Friday, but hit resistance slightly below the 46.00 (R2) hurdle and retreated to fall back below the psychological barrier of 45.00 (R1). On the 1-hour chart, I see a short-term uptrend but the current setback is likely to continue, probably to challenge the 43.40 (S1) obstacle as a support this time. Our hourly oscillators support the notion as well. The RSI exited its above-70 territory, while the MACD has topped and fallen below its trigger line. What is more, there is negative divergence between the RSI and the price action. On the daily chart, I still see a longer-term downtrend. As a result, I would treat the near-term uptrend as a corrective phase of that major down path, at least for now.

• Support: 43.40 (S1), 42.75 (S2), 41.80 (S3)

• Resistance: 45.00 (R1) 46.00 (R2), 46.65 (R3)

Gold trades somewhat higher

• Gold traded somewhat higher on Friday after breaking above the 1128 (S1) barrier on Thursday. I still believe that the rebound may continue for a while, perhaps to test the prior uptrend line taken from the low of the 7th of August as a resistance. However as long as the metal is trading below that trend line, I would consider the short-term bias to be negative. I would treat any extensions of the current rebound as a corrective move before sellers seize control again. Our short-term momentum studies support the case of further rebound. The RSI hit support near its 50 line and turned up again, while the MACD has bottomed and crossed above its trigger line. As for the bigger picture, with no clear trending structure on the daily chart, I would hold my neutral stance as far as the overall outlook is concerned.

• Support: 1128 (S1), 1118 (S2), 1110 (S3)

• Resistance: 1146 (R1), 1156 (R2), 1168 (R3)

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