For a more complete summary of the week just gone, please refer to our FX review from last weekend. The main thoughts from it focused on the risk-off sentiment seen in the FX markets. This was driven by the situation in Afghanistan, Fed minutes released and also new lockdowns seen in New Zealand. In the FX preview for this week, we expect similar themes to be driving markets, adding into the mix the important Jackson Hole summit.
Previewing Jackson Hole
The Jackson Hole summit has traditionally been an event where changes in Fed policy have been announced. It isn’t classified as an official FOMC meeting, so can be used to make comments that are less ‘on the record’ as it were. The summit is online this year (like 2020) due to the pandemic. However, it doesn’t take away any potential important from it.
Fed chair Powell will speak, with markets looking to see whether he will elaborate on the timeline for announcing or starting tapering off of asset purchases. It’s expected that he will state that all future meetings this year are live for a potential tweak. The shifting of expectations sees markets pricing in a strong likelihood of starting the process before the end of the year.
For the USD, the speed of the timeline will give it either a boost or a slump. The quicker the tapering, the faster US yields should rise, which in turn should lead to a stronger dollar.
When looking to have a preview for FX this week, one of the themes we are looking at is a rebound in risk sentiment. From a technical point of view, AUD, NZD and CAD seem to be oversold. In the absence of any deterioration or fresh news, we expect these pairs vs USD to bounce in the early part of this week.
Of the three, we would favor buying CAD. This is because the lockdown in NZ has been extended, and PM Morrison in Australia didn’t strike a particularly convincing tone in his speech over the weekend.
No love for EUR
Finally, it looks like EUR could continue to be an underperformer in the week ahead. The lack of pickup in yields from the Eurozone makes the Euro a likely funding currency for the commodities mentioned above. Investors will likely want to hold on to other low yielder such as CHF and JPY given the safe haven status they have. So the logical currency to sell in this case would be the Euro.