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