Market Overview

26 August 2020

The West is the Best While Waiting for the Jackson Hole Sun

All major currencies on the forex market were put into a cold storage, and probably will be there before the end of the week, as many investors postponed their bets ahead of Thursday's speech by Jerome Powell, the U.S. Federal Reserve’s (Fed) Chairman. Not only are some of his Fed colleagues are expected to talk at the famous annual Jackson Hole conference, the Bank of England's Governor Andrew Bailey and the European Central Bank chief economist Philip Lane are also going to join the Wild West-esque financial meeting. 

The Jackson Hole conference, or symposium, has been scheduled to take place at the end of August since 1982 at the magnificent mountain resort of Wyoming state, but this year the global monetary policy makers will just hold a virtual conference. The event will be live streamed to the public with Jerome Powell's address to the conference set for August 27 at 9:10 a.m. New York time. 

His theme is "Navigating the Decade Ahead: Implications for monetary policy", so the investment community may expect him to  shed more light on the U.S. central bank’s strategy. "If we don't get dovishness, I expect you might actually get rates rising and pop up higher in the U.S. dollar," said Westpac FX analyst Imre Speizer. "The Dollar has had a massive fall since March," he said. "I think what we're seeing now is any excuse to buy it back as the punters who have been short all the way down get quite nervous and take the money off the table". 

However, this is clearly not the prevailing view today. In all recent statements, including the minutes of July's meeting, the Fed's representatives were sending out the kind of messages that suggested  they needed the markets to provide a shoulder to cry on when economic circumstances got tough. They revised down their previous pandemic forecasts for gross domestic product (GDP) figures, the labour market and inflation indicators, and hinted several times in a row at the need for more fiscal stimulus on the base of keeping zero interest rates until the economy fully recovers or even for some additional time afterwards. 

After the crisis of 2008, the Fed continued to print dozens of billions of U.S. Dollars every month for another six years, modestly calling the process "quantitative easing" (QE). The American regulator also kept the Fed's fund rate near the zero level until the end of 2014. It is difficult to imagine that now the Fed would halt in order to take advantage of the pandemic shock for a long and happy operation of the money printing press at its maximum potential capacity. Since it is required not only by the American or global economy needs, but above all, by the lopsided and skewed financial system of the United States, which suffers from excessive deficits and is overloaded with almost $27 trillion of public debt. 

By the way, Ben Bernanke, who was the Chairman of the Federal Reserve in the previous crisis, chose the Jackson Hole rather informal format to announce the start of the QE programs that was a very extraordinary measure for that time. The next head of the Federal Reserve, Janet Yellen, also made an important policy statement at one of the Jackson Hole located symposiums. That is why most experts are expecting, not a surprise, but at least another dovish play round from Jerome Powell this time. It would be rather strange to hear an open-hearted and untimely confession from the Chairman that would sign the future tapering of the printing press volumes or the end of some other unconventional measures at the very beginning of the exit from the economic downturn stage. 

The emphasis on a slow recovery, and, therefore, on the need to keep an ultra-loose monetary policy for a longer time, in the speech of Mr Powell or his associates, could rather energize Greenback bears and gold bulls to back them into action again after a short pause made for the technical consolidation during the last several days. In case of such a scenario, a current partial price correction for the U.S. Dollar may be replaced quickly by another wave of depreciation for the world's main reserve currency. Moreover, the likely positive assessments of a decade of future growth ahead of Mr Powell's speech could only reduce the value of the potential safe-haven status of the U.S. currency, so it may even increase the chances that the Dollar would not yet find enough supporters from Treasury bond purchases. “Gold will likely resume the uptrend and revisit the record high of $2,075 if Powell signals greater tolerance for above-target inflation, fuelling a deeper drop in real or inflation-adjusted bond yields and fresh sell-off in the Greenback,” said Omkar Godbole on FX Street. 

"The West is the best", as Jim Morrison sang in his famous "The End" composition, adding "Get here and we'll do the rest... The blue bus is calling us. Driver, where are you taking us?" And so, the markets will check it soon, but now the majority is waiting for the Jackson Hole sun, which will rise in the virtual Wild West, and then the markets could see the next reference point or even the mid-term direction. 

But, of course, there is a small chance that this year's conference will become a gathering of prosy speakers, with no immediate consequences for markets. If so, currencies and gold may have to wait for more drivers in the news feeds, with a natural delay for the first half of September. "The monetary authorities have gone to unprecedented lengths to combat the Covid-19 crisis, flooding the global economy with trillions of dollars in liquidity and credit, and in the process have become a towering presence in the financial markets. But the pandemic has also exposed an unpleasant reality for the monetary mavens: After decades in which they rode high as overseers of the global economy, they no longer have the firepower to manage the business cycle on their own. They need the help of fiscal policy makers to do that - a fact made painfully clear by the U.S. congressional stalemate over another stimulus package and the threat that poses to the nascent economic recovery," Rich Miller, a contributor journalist, wrote yesterday on Bloomberg. 

Ex-Fed official, Roberto Perli, remarked that the coronavirus crisis would likely prompt households to save more to protect themselves against the economic ravages of another Covid-19-like pandemic. That in turn may put downward pressure on interest rates, leaving the Fed less room to cut them in a recession. "The result is that the U.S. could end up looking a lot like Japan. The Bank of Japan has held short-term interest rates around or below zero for more than 11 years. Yet, the country is still saddled with a sluggish economy more prone to tipping into a recession and a too-low inflation rate that periodically threatens to morph into deflation," said Perli. A former U.S. Treasury Secretary Lawrence Summers provocatively put it in a Princeton University webinar earlier this year: “I sort of suspect that we’re past peak central banking”.

 

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