U.S. Dollar falls to its lowest value since January 2015 versus a basket of currencies, due to Janet Yellen’s dovish tone
At the Jackson Hole meeting on Friday, the leaders of both The Fed and the ECB issued very different proclamations with regards to their central banks’ current positions and future guidance, which caused their respective currencies to move in polar opposite directions. Despite a previous and thinly veiled commitment to begin “unwinding” the Fed’s $4.5 trillion balance sheet in the days leading up to the symposium meeting, Janet Yellen failed to deliver the hawkish narrative many analysts and investors were expecting, offering up no ideas as to how the great unwind will be structured, or the timing of the process. Moreover, her platitudes at Jackson Hole failed to commit to further interest rate rises.
Mrs Yellen also suggested that any forthcoming financial regulation, involving altering the Dodd-Frank protocol, which was put in place to protect any future excessive banking behaviour, excesses that caused the sub prime meltdown from 2007 onwards, should be carefully orchestrated and be, in her opinion; “modest” adjustments. The Dodd-Frank Wall Street Reform and Consumer Protection Act was a massive piece of financial reform legislation, passed by the Obama administration in 2010, as a response to the financial crisis of 2008.
This stance on Dodd-Frank puts her in direct confrontation with Trump, who wants banks to enjoy more freedom, similar to the pre 2007 levels of relaxation. Trump’s chief financial policy advisor, Gary Cohn quashed resignation rumours on Friday, whilst also stating that the planned roll back of corporation tax, in order to make USA taxes the lowest of the G7 countries, is still on track. U.S. equities initially rallied on his commitment, but the leading U.S. indices failed to hold onto the majority of the gains; the DJIA closing up 0.14% and the SPX up 0.17%. The dollar slumped versus its major peers; EUR/USD closing at circa 1.1912 on Friday, its highest level since January 2015, with GBP/USD closing the New York trading session out at circa 1.2877, up 0.7%, posting cable’s first week of gains in over three weeks. The dollar index also fell to its lowest level since January 2015. The euro gained versus all of its peers as (in contrast to Mrs. Yellen), Mario Draghi surprised investors and analysts by striking a moderately hawkish stance, when speaking at the symposium.
The COT report (commitment of traders) published on Friday, revealed that the net short positions in sterling rose marginally, euro net longs increased, yen net short positions decreased, Aussie dollar net longs were effectively unchanged, as were Swiss franc positions, gold net longs increased significantly.
Significant economic calendar events for August 28th, all times quoted are London (GMT) time
12:30, currency impacted USD. Wholesale Inventories (JUL P). Inventories are forecast to have fallen to 0.3% in the month of July, from the 0.7% figure published in June.
12:30, currency impacted USD. Advance Goods Trade Balance (JUL). A figure of -$64.5b is predicted for the July deficit, this would represent a modest deterioration on the -$63.9b figure for June.
14:30, currency impacted USD. Dallas Fed Manufacturing Activity (AUG). The figure is expected to remain unchanged, from the July figure of 16.8.
23:30, currency impacted JPY. Jobless Rate (JUL). The jobless rate in Japan is one of the lowest 2.8% in the G20, and the lowest in the G7. The June recorded figure of 2.8% is expected to remain unchanged. With Japan’s GDP and other recently published hard data being extremely positive for the nation’s economy, investors will be looking for a similar unemployment rate to be maintained.
23:30, currency impacted JPY. Household Spending (YoY) (JUL). Household spending in Japan is forecast to shrink to 0.7% in July, from the 2.3% annual rate published in June, due to seasonal factors.