Jackson Hole: Yellen's Speech A Game Changer For USD
Markets Awaiting For Yellen; Looking To Buy A USD/JPY Dip
If markets are waiting for Jackson Hole the good news is that, unlike Godot, Janet Yellen really will turn up. I doubt she’s going to say anything that radically alters sentiment, but that’s another story, and one for tomorrow more than today. If there’s a trend today, I suspect it will just be more yield-searching.
The market’s default position is to wait for Ms Yellen’s speech and then conclude that the Fed will still only be hiking rates so slowly that we’ll hardly notice when they eventually do. That’s not a recipe for either volatility or much in the way of dollar strength. Even so, having fallen 8% on a trade-weighted basis since real Treasury yields started falling in January, the dollar is still 25% higher in value than it was four years ago as rally was just getting going. Those real yields matter. 10yr TIIPS yields fell by 90bp to -0.1%, but have edged back up a bit and the context for the Fed’s rethink on monetary policy is that 10-year real yields are barely above zero. I’d rather be short TIIPS than long them at these yields and if that’s what’s driving the dollar then….
I continue to wait in vain for USD/JPY to spike lower (so that I can buy it). That’s just frustrating
Is the market hedging for a dovish Yellen?
USDJPY options are the most active options today
On yesterday's option board I noted an abundance of put options in USDJPY, and today so far, they've been the most active contract.
Dollar yen option trading has accounted for 46% of trades so far through Asia trading and there's been a $300m 99.75 put trade put on today with a 29th Aug expiry.
5 reasons why Yellen may avoid hints on timing of Fed rate hike–experts
1. The topic strays from near-term concerns
The speech, scheduled for 14:00GMT, or 10:00AM ET, on Friday, is titled “The Federal Reserve's Monetary Policy Toolkit”.
“We do not expect much insight about the timing of the next Fed hike from Yellen’s speech,” Bank of America Merrill Lynch economists said in a preview note to clients, explaining that the Fed chief was likely to stick to the topic and focus more on the neutral rate of interest, dubbed R*.
“The market is hoping that she's going to give us clarification, not only on long-term monetary policies, but also some clarity on current monetary policy,” JP Morgan Asset Management managing director Priscilla Hancock explained in a CNBC television interview.
“It's likely that the market is going to be disappointed,” Hancock warned, recommending that it “would be wise not to expect too much from Janet going into Friday."
2. Too much can happen in a month
Moody’s Analytics also downplayed the possibility of interest rate hints from the speech.
"There is roughly a month between the conference and the FOMC meeting, which is an eternity for the Fed, as a lot can happen," they said.
3. Jobs report could sway the tide
Many analysts felt the data-dependent Fed would take its cue on rates from the August employment report that will not be released until after Yellen’s speech on September 2.
“Another firm report for August will increase FOMC members’ confidence further ahead of next month’s meeting,” RBS said.
“Another solid employment report would go a long way in building the case for a September rate hike,” BMO Capital Markets agreed.
“The September payroll number is likely to be more important than the Jackson Hole speech,” Deutsche Bank affirmed.
4. Fed is focused on inflation
Morgan Stanley, however, argued that “inflation holds the key to further Fed rate hikes.”
They pointed out that the core PCE (personal consumption expenditures) inflation was at 1.6% in June and forecast July’s data to come out at 1.5%, dropping further from the Fed’s target of 2% and removing pressure to hike rates.
This data point was also scheduled for after Yellen’s remarks on August 29.
5. Credibility at stake
Back in December, Fed officials had forecast that the central bank would tighten four times in 2016.
Some Fed officials constantly criticized the markets, insisting that rate hike increases were too pessimistic, only to be proven wrong by a dismal May jobs report and concern over the impact of the U.K.’s surprise decision to leave the European Union.
"Being on constant Fed Watch has become so exhausting," The Lindsey Group analyst Peter Boockvar wrote.
"We've been led in so many different directions only to be spun around again that until I see exactly what they do, I'm losing patience in listening to what they say," he added.
A growing voice among analysts and traders follows Boockvar’s thinking suggesting that the Fed is losing credibility.
Barclays economist Michael Gapen wrote in a preview to the speech that “(investors) question whether (Yellen) will ever see data that will justify a rate hike.”
“I think she herself has a credibility problem with markets,” Gapen concluded.
In this light, the pressure may be on Yellen to avoid making a commitment on rate hike timing and then find herself once again in the position of having to backstep.
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In our view the Fed are trying to guide the market to increase pricing for a September hike, but rates markets remain reluctant to react and against this backdrop our FX Momentum model shows overall USD momentum now at multi-year lows testing the very weak levels seen only a few times over the past few years. Notably, tests of this area back in Q2 2014 were subsequently followed by a significant recovery in the USD.
We think Fed Chair Yellen’s speech on Friday has the capacity to be a game changer for the USD and we remain positioned for USD gains via derivatives in EURUSD, USDJPY, AUDUSD and GBPUSD accordingly.
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