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.
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.
The views expressed in this article are solely those of the author and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates. This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on 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 the information is accurate or complete. The information should not be viewed as tax, accounting, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, 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, accounting and other advisors and only make investment decisions on the basis of your own objectives, experience and resources.
All non-SVB named companies listed throughout this document, as represented with the various statistical, thoughts, analysis and insights shared in this document, are independent third parties and are not affiliated with SVB Financial Group.
The views expressed in this article are solely those of the author and do not necessarily reflect the views of SVB Financial Group, Silicon Valley Bank, or any of its affiliates.
This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on 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 the information is accurate or complete. The information should not be viewed as tax, accounting, investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, 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, accounting and other advisors and only make investment decisions on the basis of your own objectives, experience and resources.
All non-SVB named companies listed throughout this document, as represented with the various statistical, thoughts, analysis and insights shared in this document, are independent third parties and are not affiliated with SVB Financial Group.