This week, Mike van Dulken from Accendo Markets looks into his crystal ball ahead of Janet Yellen’s speech on Friday…
All eyes (and ears) will be on her majesty the US Fed chair Janet Yellen this Friday, when she delivers what could be major market-moving speech at the Kansas City Fed Economic policy symposium in Jackson Hole, Wyoming. It is hoped that her talk will include hints (both clear and, of course, cryptic) about the path for US monetary policy. This is because the US Federal Reserve is the only major central bank fortunate enough to be in the position of being able to tighten policy post-crisis. And the reach and influence of the world’s reserve currency (the US Dollar) is far and wide as commodity traders well know.
Fed members have sounded hawkish of late, suggesting a rate hike might indeed be warranted sooner than markets are pricing in, but the US dollar remains well off its summer highs. In fact, it’s not far from its summer lows with a rising trend of support going back four months. We believe this provides Yellen with the breathing space she needs to take a rather hawkish tone, without it resulting in so much US dollar strength that it actually prevents her and her committee from voting for another hike in September.
We still see September as highly unlikely. Even December to us is off the cards when you take into account political event risk on both sides of the Atlantic (Trump stateside; Spain and Italy in Europe). Yes, there are US data points suggesting a US rate hike could be due, but surely not while other central banks are doing the polar opposite. The European Central Bank is widely expected to add to stimulus on 8 September while the Bank of England updates us on 15 Sept and the Bank of Japan could move again towards the end of next month.
Don’t forget that every step the latter group takes to ease policy further, which serves to weaken their own currencies, has the offsetting effect of strengthening the US dollar. A US rate hike, or a strong hint of one being imminent, therefore represents a risk for Yellen. It will potentially send the US dollar much higher than the Fed might be comfortable with, thus becoming a hindrance for exporters. Even if it gives consumers more bang for their buck in terms of imports.
The Fed has been at pains to hammer home a message of a ‘slow and gradual’ pace of future hikes, aiming to keep the US dollar index from returning to flirt with the 100 mark it traded around at the beginning of December and end of January. Would it risk sending it back there? Yellen is still having to tread the fine line between countering market complacency about low rates forever while simultaneously prepping traders for another eventual US hike. Not an easy job.
Economic barometer copper is already back testing July lows. We wonder whether a hawkish tone this Friday could serve to deliver a real dent to the commodity space, with a negative knock-on for the FTSE’s mining contingent. We already see the red-metal and others (aluminium, oil) putting raw material-focused names on the back foot this morning as a result of last night’s US dollar rebound. Could these trends become rather unwelcome friends?