- Expert Views
Natixis: US dollar supported by Jackson Hole Fed meeting
1 September 2016 • Source: Nordine Naam, Senior Forex Analyst, Natixis
The US dollar firmed last week in the run up to Janet Yellen’s keynote speech at the Jackson Hole Economic Symposium. The greenback benefitted from numerous statements by Federal Open Market Committee (FOMC) members, most notably positive comments from Stanley Fischer. The Federal Reserve’s (The Fed) Vice President said that the institution was nearing its full employment and 2% inflation targets – while Kansas City Federal Reserve’s President, Esther George, was more hawkish by declaring that interest rates should be raised gradually. Of course, such sentiments follow a raft of encouraging macroeconomic indicators, including new homes sales and direct investment figures that have confirmed that economic activity has increased in Q3. Indeed, with Atlanta’s Fed putting Q3 growth at +3.4%, up from +1.2% in Q2, myriad indicators suggest it is high-time for the Fed to act.
However, despite many hawkish sentiments, the Fed’s chair, Janet Yellen, said monetary policy will begin to tighten at a gradual pace, but stopped short of setting out a timeline. Following Yellen’s comments, the US dollar dropped briefly but later rebounded against most currencies, while the probability of a 25 basis point Fed Funds rate hike increased to 64%. In the mid-term, two positive factors signal a further rise in the dollar. The first, the US Generic Govt two-year yield reached 0.83%, which will continue to support the dollar. And second, weak speculative positions in the forex market may bolster the greenback’s rally.
This week, the dollar’s performance will be buoyed by a raft of new indicators, including the Employment Situation Report, which has tended to beat expectations in recent months. In this respect, the Fed will struggle to delay an interest rate hike indefinitely if job creations display robust growth above 150,000.
EUR/USD: heading towards 1.104
Ahead of the Jackson Hole Economic Symposium, the invigorated US dollar ensured the EUR/USD corrected back below 1.13, although the pair’s correction was limited compared with corrections to other G10 currencies. That said, the euro remained strong despite disappointing business surveys from both France and Germany, as well as a lack of statements to rally the euro’s performance from European Central Bank (ECB) members.
Towards the end of last week, the EUR/USD declined following Janet Yellen’s hint that an interest rate hike is on the horizon. At present, we remain pessimistic about the EUR/USD, and expect the pair to decline towards 1.104 before the Employment Situation Report’s release this Friday. In addition, the publication of the ECB’s August inflation flash estimate could potentially harm the EUR/USD, as the estimate could reinforce the ECB’s position that an accommodating monetary policy is necessary for the indefinite future.
GBP: Buy EUR/GBP at 0.854
Lifted by positive sentiments in the Confederation of British Industry (CBI) survey, sterling strengthened against the euro last week, which has relaxed fears the Bank of England (BoE) must implement further monetary easing measures – at least in the short-term. Despite this, we remain negative on the sterling due to the prospect of slowing growth and the deepening twin deficits (both the current account balance and fiscal deficits). With this in mind, we expect the UK’s current account deficit to become increasingly harder to finance in the mid-term, which may spell danger for the pound.
In the coming weeks, expect the UK’s exit from the European Union (EU) to return to the headlines, as UK government officials meet extensively with European counterparts for informal talks regarding the UK’s future position outside the bloc – with both the UK’s access to the single market, and the continuation of financial passporting, the key topics of interest. If and when Article 50 is invoked, we expect UK growth will be dampened considerably and for the UK’s future demands from their European counterparts to be more widely known.
In this environment, expectations for a bank rate cut will intensify, which will, in turn, put immense pressure on sterling. One factor that may slow the pound’s depreciation, however, is the market already seems short of the currency. All things considered, we recommend buying the EUR/GBP at around 0.854 with a target at 0.87, then 0.90 over the mid-term.
USD/JPY to move towards 103
The USD/JPY held around 100 last week, despite Japan’s increasing capital outflows as investors seek higher yields – prompting fears that the yen is overvalued. Indeed, the central bank’s policy has failed to recover the country’s anaemic growth or its negative inflation, which stands at 0.4% year-on-year (YoY), as investors wait for decisive measures that mend the current economic landscape.
That said, the Japanese yen may experience short-term relief as the dollar recovers following heightened expectations of rate hikes. With the Employment Situation Report released this Friday, we expect the USD/JPY to move towards 103, or even 104.
Commodity currencies become firmer
Given the stable US dollar, we believe commodity currencies should extend their rise. We predict the AUD/USD will clamber towards 0.78, as the Australian dollar draws strength from indicators including retail sales, investment and building permits figures, just before the market’s attention shifts towards the US’ Employment Situation Report.
Elsewhere, the New Zealand dollar also experienced an upturn last week, as the Royal Bank of New Zealand (RBNZ) hinted that an interest rate cut was unlikely in the short-term. Indeed, the RBNZ’s fears that a property bubble could burst in the future are informing this position. As a result, the NZD/USD pair could recover towards 0.74, especially since dairy product prices rose sharply in August.