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FX TAKEAWAYS FROM THE CENTRAL BANK SYMPOSIUM AT JACKSON HOLE

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This past weekend the Federal Reserve held its annual Jackson Hole Economic Symposium – a get-together of central bankers from around the world and other market experts and luminaries.

Typically, the event does little to shake financial markets. This year, however, the Federal Reserve and the movers and shakers of the financial world were faced with a uniquely complicated financial scenario – the longest U.S. equity bull market on record, a flattening U.S. yield curve, the strong dollar, a U.S./China trade war, and an evolving emerging market crisis. 

Here are key takeaways from the event and how they impacted the FX markets:

  1. The opening speech by Chairman Powell was slightly dovish. He admitted that as he has been guiding interest rates higher, he finds it extremely challenging to estimate the correct level of a neutral (final) interest rate. He also made it clear that he would err on the side of caution as he “gradually” moves rates higher.  He said the Fed would be on alert to any signs of an overheating economy.

FX market response: FX traders drove the dollar lower last week, correctly anticipating dovish talk from Powell. However, traders remain net long dollars across the board. And, since long dollar positioning is becoming increasingly overcrowded, we may be seeing the beginning of good sized dollar sell-off. Before jumping fully on board, however, we should wait until next week, when summer ends and senior FX traders around the world return to their trading desks.

  1. Stephen Poloz, the Bank of Canada governor, made a case for restraint in hiking rates, suggesting that the digital revolution is curbing inflationary pressures.

FX market response: Traders initially sold CAD on Poloz’s dovish comments, but then CAD rallied very quickly.  Already this week, CAD has seen further gains due to renewed hope that U.S./Canada trade negotiations will move forward following Trump’s announcement of a new U.S./Mexico trade agreement.

  1. The other three major central bankers – European Central Bank president Mario Draghi, Bank of England Governor Mark Carney, and the Bank of Japan's Haruhiko Kuroda – all missed this year's event, so they made no speeches or pronouncements.

Final remarks:

These central bank get-togethers are usually meant to maintain status quo and not to shake up expectations, raise questions or foster market sentiment. 

Objective largely achieved.

Further reading:

For insight into the factors driving today's global currency movements, read SVB's Daily FX Update.

©2018 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This article is intended for U.S. audiences only.

The views expressed in this article are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.

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