Coin Flip and NFP

AS the Jackson Hole fallout takes shape, it’s clear the Federal Reserve Board was attempting some measure of damage control to repair their failing report card.The Federal Reserve Boards credibility comes under the light time and time again, whether from constant misdirections or divisive policy debates that rage on in the public domain.

Afte a week of guessing, Dr. Yellen left little to the imagination when she stated the case of a Fed rate hike had strengthened but remained very much data dependent. Given the proximity of the Granddaddy of all Fed Data, Non-Farm Payroll( NFP), without question, this week’s print takes on higher importance.

While there’s never a shortage of hyperbole leading up to  NFP, this is week’s highly anticipated event will likely be a chart topper in that regard

But after all was said and done we’re still left pondering the most fundamental question, when will the Fed lift off. As it stands, the market is still in monetary no man’s land while presumably back to a coin flip leading up to this week’s US payrolls data.

Australian Dollar

When the dust settled on Jackson Hole, the Australian Dollar was one of the casualties.  While Janet Yellen was rather non-committal to rate hike timing, her wingman Stanley Fischer drew most of the markets attention.  When asked whether we should be “on the edge of our seat” for (1) a rate hike as soon as the September FOMC meeting, and (2) more than one rate hike this year, Fischer replied that “what the Chair said today was consistent with answering ‘yes’ to both of your questions”. With Traders positioned for a December lift off, the repricing of a September probability now takes center stage.

However, whether Fed Fischer’s comments was another in a long list of  Fed Editorials or conveying the FOMC intentions, therein lies the debate    None the less, with the odds of September rate hike  likely to increase, commodity and EM currencies will probably feel the brunt.The market closed Friday with a September hike now at 42% probability and a December 2016 hike 65% chance up from 32% and 57% the day before.

While Friday’s Non-Farm Payroll outcome could ignite the next significant USD dollar trend,  local traders will have a busy economic diary to wade through, including Building Permits, Retail Sales and CapEx numbers which could influence RBA policy bets adding another layer of intrigue to the shifting divergent interest rate policy debate?

With the Chase for Yield more likely on the near-term back burner, I suspect Hard Commodities, Oil, and China may come back in focus. The eerie calm in the RMB complex has investors on edge leading up to this week’s China  PMI readings.

At the end of the day, the RBA is likely applauding the weaker Australian Dollar post –Jackson Hole, especially given that the RBA domestic monetary policy action has been ineffective at curbing currency strengthJapanese Yen

BOJ Kuroda likely has a broad smile on his face with Yellen and Company preparing to do the ” heavy lifting, and nudge US  interest rates higher. With USDJPY trading topside of the current near-term range, will Kuroda dig in heels and forward guide markets to a Bazooka Sept 21 BOJ? He certainly wasted little time turning up the rhetoric at Jackson Hole stating the BoJ has  “ ample space for additional easing.” Despite this rhetoric, Kuroda will need to contend with the growing number of Bank of Japan officials who are gravely concerned at the underlying ineffectiveness of this massive policy spend, so far.

The BOJ  policy is not without outside detractors; Japans FSA warned the BoJ of risks to the local banking sector from lower interest rates.  Also,  Fed Kaplan chimed in with  ” the Jury is out on the effectiveness of NIRP in Japan, it might by time but no substitute for structural reforms Kaplan told Bloomberg TV. So far the Bank of Japan three arrows have badly missed their mark leaving traders highly doubtful the BOJ can right the ship.

Whatever the BoJ decides, it will probably have limited Shock and Awe effect and will likely be as useful as a carrot less stick in guiding markets.Yuan

Tracking the underlying USD movement the Yuan weekend but fell shy of testing the 6.70 level purported to be the PBoc near term line in the sand.

The other primary concern is the fear of a liquidity squeeze after the Pboc resumed 14-day reverse repo operations. I suspect this is a bit overblown and after the initial negative fall out

Money Markets will quickly normalize.

China’s latest PMI data will be watched closely following a weak start to Q3. K, last month data indicated factories continue to struggle with Global demand stumblingUSDAsia 

We should expect some near-term adjustments on the back of the Fed Repricing but to what degree, the markets have moved off the inclination to sell USD on rallies and given the USDAsia high correlation to JPY lately,  its best to follow the market tack in this regards. EM Asia  Positions were trimmed leading up to Jackson Hole, but to what propensity they re-engage short term, will likely depend on the outcome from  this week’s NFP dataOil 

After a week of yo-yo on OPEC chatter and geopolitical concerns. With the jury out on the OPEC production freeze,  near-term fundamentals and supply concerns will dominate price action. While we should expect a shifting landscape on the latter, the bigger picture has yet to unfold on the prior. Needless to say, if an agreement’s struck  it will be near-term positive for Oil prices as a positive for prices But  surging oil prices will likely open up another can of works as US  shale oil rigs come back online

In any case, the Baker Hughes rig count data will continue to be a significant price catalyst. Currently, the count stands at 406 down from 647 a year ago, which indicates lots of room for more production.

About Stephen Innes

Senior Currency Trader and Analyst, Stephen has over 25 years of experience in the financial markets and specializes in Asian currencies at OANDA . After having started his trading career with NatWest Bank, he is currently based in Singapore as a Senior Currency Trader and Analyst with OANDA, focusing on the movement of the Aussie Dollar and ASEAN Currencies. Stephen has an extensive trading experience in Interest Rate Futures, Money Markets and Precious Metals. Prior to joining OANDA, he worked with organizations like Cambridge Mercantile, Nat West, Garvin Guy Butler, Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario. Follow on Twitter profile.

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