Dollar Dumped as Yellen Fails to Deliver at Jackson Hole

Jackson Hole was damaging but not a disaster for the U.S. dollar.  The greenback traded lower against all of the major currencies with the EUR/USD rising to its strongest level since January 2015 and USD/JPY sinking back towards 109.00 before settling above that level. In some ways the move was surprising because Janet Yellen's comments should have been positive rather than negative forthe greenback.  She said substantial progress has been made in their twin goals of hitting 2% inflation and full employment and she also felt that excessive optimism could return sooner or later. But that's all Yellen said about monetary policy and based on the decline in the dollar on Friday investors clearly wanted more.  She did not mention balance sheet normalization and certainly did not touch on future rate hikes.  This does not mean they are not on her mind but with the market's high expectations for this speech, investors were disappointed when Yellen failed to provide stronger policy guidance.  The biggest breakout this past week was in euro, which enjoyed a far stronger move than the greenback after Jackson Hole. As many economist anticipated, ECB President Draghi did not share any new information on the central bank's monetary policy plans but he said the Eurozone recovery is gaining momentum. Although he also added that they aren't quite there on inflation, the market completely ignored these words.  He's reserving the big announcements for his home turf and taking a break before the real action in Europe begins the first week of September. 

The last week of August tends to be one of the quietest in the FX market so we could see more consolidation than breakouts.  Traders in Europe are winding down their month long holidays just as U.S. investors gear up for the long weekend and the last week of summer.  Outside of Friday's non-farm payrolls report, there's not much on the economic calendar but NFPs could incite major volatility in currencies.  Not only could lower liquidity compound the market's reaction but it is also the last jobs report before the September Federal Reserve meeting.  Given the strong labor market numbers reported earlier this month, softer data is expected all around. At the start of August, we learned that payroll growth, average hourly earnings and labor force participation increased in July, driving the unemployment rate down to 4.3%.  That momentum is not expected to last with lower projections for payroll and average hourly earnings growth.  Most of this past week's tier 2 U.S. economic reports surprised to the downside with new and existing home sales falling sharply.  Durable goods orders did not fall as much as anticipated but still unwound nearly 50% of last month's gains and jobless claims ticked higher.  We believe the risk is to the downside for the jobs report and for this reason we see USDJPY at 109.00 before 110.00.

 While Non-farm payrolls will be front and center, all investors are keeping an eye on U.S. politics as the debt ceiling debate heats up. The feud between Trump and members of Congress including Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan is heating up. With the federal government close to running out of cash, the President is holding Congress and the government hostage by saying he is willing to shut the government down if it means pressuring Congress to provide funding for his U.S.-Mexico wall. These combative rather than conciliatory comments make it difficult for investors to be positive on the dollar as the debt ceiling drama could cause serious volatility in the weeks ahead.  However there's one thing that could help the dollar, which is that according to Gary Cohn, the head of President Trump's economic council a major tax reform speech is scheduled for Wednesday.  Although there won't be any specific progress on policy, Trump will use this opportunity to share his goals, shift the conversation away from his Charlottesville comments and try to convince the public that major changes are coming for the tax system.  Any talk of tax cuts often provides a boost to the greenback.  Aside from NFPs, the trade balance, conference board's consumer confidence index, personal income, spending, pending home sales, the Chicago and ISM manufacturing reports are also scheduled for release. 

 The euro's quiet strength this past week reflects the positive trend of the economy.  Manufacturing and service sector activity in Germany accelerated this month, allowing businesses to remain optimistic. However while the PMIs and expectations of the German IFO report were stronger than anticipated, the expectations component of the German ZEW survey, which measures investor confidence slumped and the overall IFO business climate index declined in the month of August.  In other words, the momentum in the economy is waning.  Yet while Draghi remained tight lipped, over the past week we heard from a number of ECB officials who seem to be taking every opportunity to spread their hawkish wings. This includes ECB member Schauble who said the central bank should tighten policy sooner rather than later. ECB Hansson downplayed the 13% rise in the euro year to date and instead described the euro's gains as not a big change.  Before that, Weidmann "sees no acute need to extend QE into 2018."  These consistent comments 2 weeks before the ECB meeting reflects the growing consensus within the central bank to normalize policy. In the week ahead it is a quiet one for many countries but EUR/USD will be on the move.  Between the U.S. non-farm payrolls report and German/EZ consumer prices and employment numbers, the data along with the performance of the euro could shape the market's expectations ahead of the ECB meeting.

 It should be a particularly quiet week for sterling with only housing market data scheduled for release. Mortgage approvals and net consumer credit are not expected to have a significant impact on the currency.  Instead it will be the market's demand for U.S. dollars and its appetite for risk that will decide whether sterling falls to fresh lows. Sterling traded with a heavy bias throughout the past week with GBP/USD falling a 3 month low and EUR/GBP reaching its highest level since October 2016. Outside of second quarter GDP growth being confirmed at 0.3%, there were no major U.K. economic reports released this past week.  Instead the central bank's ongoing concerns about Brexit, uneven data and the prospect of a stronger U.S. dollar, kept sterling under pressure and we believe these same factors will lead to the currency's continued underperformance this coming week.  The U.K. government is sticking to its view that they should not pay a penny more than our legal obligations according to foreign minister Boris Johnson. The last we heard, Brexit talks could be delayed until December - 2 months later than planned as disagreements have caused the government to hope for a change in the German government.  Germany holds federal elections at the end of September but Angela Merkel is widely expected to win. 

 It was a particularly difficult week for the New Zealand dollar, which also happened to be the worst performing currency.  It fell to its lowest level versus the U.S. dollar in 2 months and its weakest versus the Australian dollar in 5 months. Kiwis are seeing their purchasing power decline quickly particularly against the euro as the EUR/NZD exchange rate hit its highest level in 14 months. The only piece of New Zealand data that was released was the trade balance and it was better than expected. Economists were looking for the country's trade surplus to turn to a deficit in July but with exports rising a little more than anticipated and imports rising a little less, the overall balance remained positive.  Instead what caused the New Zealand dollar to fall was the country's underlying fundamentals and economic outlook.  In their latest economic update before next month's election the New Zealand government lowered their growth projections for the year to 2.6% from a previous estimate of 3.2% and cut their next fiscal year GDP forecast to 3.5% from 3.7%. These lower growth projections combined with the Reserve Bank's unease about the currency and talk of intervention puts NZDUSD on track to test 71 and possibly even 70 cents.  Although the Australian dollar also ended the week lower, unlike the New Zealand dollar there was no specific domestic catalyst. For the most part, copper and iron ore prices trended higher while gold prices consolidated so it was risk aversion that drove the currency lower.  We expect risk appetite to remain the leading driver of AUD flows but Australia and China's PMI reports could affect how the currency trades. Given the recent strength of the currency, the risk is to downside for the manufacturing report. Technically lower highs and lower lows puts AUD/USD at risk of falling below 78 cents.  

 In contrast to the other commodity currencies, the Canadian dollar traded higher nearly every day this past week with USD/CAD breaking below 1.25 before ending the week above it.  Stronger than expected retail sales growth added fuel to ongoing speculation that the Bank of Canada could raise interest rates one more time this year.  Although spending growth in general slowed to 0.1% excluding auto sales, they rose 0.7%, which was significantly stronger than the market's 0.1% forecast.  With this increase we've now seen the healthiest first half year performance for Canadian retailers ever.  With oil prices pretty much ending the week pretty where it started, crude did not pose any threat to the CAD.  However next week's economic reports may not be as kind to the loonie - retail sales and trade were weaker in June which means GDP growth that month and the second quarter could fall short of expectations. That's also true for the current account balance. So if there's a week where Canadian dollar could give up its gains, it may be the upcoming one. Support in USD/CAD is at 1.2415 with resistance up near 1.2615.