Founder & Chief Market Strategist - SAV Markets, SAV Markets

Shyam Devani

Founder & Chief Market Strategist - SAV Markets

FX & Rates

One degree of frustration over the past several weeks and months for Bond market bears is the lack of strong follow through relative to expectations in US economic data. This has raised questions about the credibility of the US recovery.It has partly, or perhaps largely, explained the low levels on yields we see at the long end of the curve, both in nominal and real terms.<a target="_blank">However, no trend lasts forever.</a>The chart below gives an idea where we might stand with regards to this underwhelming data. What is indicates is that the worst of it might be now or already behind us, either because expectations have been lowered and are thus easier to beat, and/or that we are approaching another turning point in the economy with a brighter outlook.

One degree of frustration over the past several weeks and months for Bond market bears is the lack of strong follow through relative to expectations in US economic data. This has raised questions about the credibility of the US recovery.It has partly, or perhaps largely, explained the low levels on yields we see at the long end of the curve, both in nominal and real terms.However, no trend lasts forever.The chart below gives an idea where we might stand with regards to this underwhelming data. What is indicates is that the worst of it might be now or already behind us, either because expectations have been lowered and are thus easier to beat, and/or that we are approaching another turning point in the economy with a brighter outlook.

The delivery of the ECB's policy stance and guidance this week raises questions about what is going on and which direction it is facing. The choice of words by the President is particularly interesting.

The delivery of the ECB's policy stance and guidance this week raises questions about what is going on and which direction it is facing. The choice of words by the President is particularly interesting. 

Technical Analysis

Further signs of USD weakness are coming through. The breaks on the DXY Index as well as the ones on key major currency pairs show that there is still more USD weakness to be seen before we might stabilise.

Further signs of USD weakness are coming through. The breaks on the DXY Index as well as the ones on key major currency pairs show that there is still more USD weakness to be seen before we might stabilise.

As German 10-year yield has risen, it is now testing an important zone of resistance levels What happens here around minus 39 bps to minus 36 bps is going to be key, at least in the short term.If it is overcome, we could be on our way to minus 15 bps over the coming weeks which would likely support EURUSD given how US yields seem to lack a strong trend

As German 10-year yield has risen, it is now testing an important zone of resistance levels What happens here around minus 39 bps to minus 36 bps is going to be key, at least in the short term.If it is overcome, we could be on our way to minus 15 bps over the coming weeks which would likely support EURUSD given how US yields seem to lack a strong trend

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Olivier Desbarres

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4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

Federal Reserve Chairperson Jerome Powell’s pre-prepared opening <a href="https://www.federalreserve.gov/newsevents/speech/powell20210827a.htm" target="_blank" rel="noopener">speech</a>at the Jackson Hole Symposium on Friday afternoon was a key litmus test for the central bank. Powell took yet another small step towards an eventual tapering this year of the Fed’s asset purchases and a tightening of arguably extremely loose monetary policy while pouring cold water on any talk of policy rate hikes, broadly in line with our expectations. Price action in US rates, equity and FX markets in the past four days would suggest that Powell has successfully cleared yet another important hurdle. US Treasury yields across the maturity spectrum are down since Thursday’s close in the bottom half of their post 16th June Fed policy meeting range, the US Dollar has weakened about 0.7% to a 3-week low and the S&amp;P 500 is hovering near a record-high (see Figure 1). <a href="https://www.chicagofed.org/publications/nfci/index" target="_blank" rel="noopener">National financial conditions</a> remain very easy and supportive of domestic economic growth. Notably recent market moves have been orderly, with volatility still pretty modest. Perhaps unsurprisingly given low US Treasury yields and buoyant US (and global) equities, Emerging Market currencies, particularly high-yielders, have outperformed in the past month.The next hurdle for the Fed and financial markets is the 22nd September policy meeting, with the spike in market volatility following the 16th June meeting still fresh in their minds. We think the Fed will refrain from giving a more specific timeline for the start of its taper and do so only at its <a href="https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm" target="_blank" rel="noopener">3rd November</a> meeting to retain some data-dependent policy flexibility. However, we expect the Fed’s updated dot-chart to show a further hawkish shift in terms of the appropriate timing for policy rate hikes. Whether this jars, even if temporarily, with Powell’s disassociation between QE and interest rate policy is open to debate.We are for now sticking to our core scenario that the Fed will only start hiking its policy rate in 2023 but that the gap between the start of the taper and the start of the rate hiking cycle will be smaller than the 23 months gap in 2014-2015.Nevertheless, the Fed will want to engineer a slow landing – music to the ears of doves and bulls but arguably a concern for hawks fearful of the Fed and financial markets stalling.

Federal Reserve Chairperson Jerome Powell’s pre-prepared opening speechat the Jackson Hole Symposium on Friday afternoon was a key litmus test for the central bank. Powell took yet another small step towards an eventual tapering this year of the Fed’s asset purchases and a tightening of arguably extremely loose monetary policy while pouring cold water on any talk of policy rate hikes, broadly in line with our expectations. Price action in US rates, equity and FX markets in the past four days would suggest that Powell has successfully cleared yet another important hurdle. US Treasury yields across the maturity spectrum are down since Thursday’s close in the bottom half of their post 16th June Fed policy meeting range, the US Dollar has weakened about 0.7% to a 3-week low and the S&amp;P 500 is hovering near a record-high (see Figure 1). National financial conditions remain very easy and supportive of domestic economic growth. Notably recent market moves have been orderly, with volatility still pretty modest. Perhaps unsurprisingly given low US Treasury yields and buoyant US (and global) equities, Emerging Market currencies, particularly high-yielders, have outperformed in the past month.The next hurdle for the Fed and financial markets is the 22nd September policy meeting, with the spike in market volatility following the 16th June meeting still fresh in their minds. We think the Fed will refrain from giving a more specific timeline for the start of its taper and do so only at its 3rd November meeting to retain some data-dependent policy flexibility. However, we expect the Fed’s updated dot-chart to show a further hawkish shift in terms of the appropriate timing for policy rate hikes. Whether this jars, even if temporarily, with Powell’s disassociation between QE and interest rate policy is open to debate.We are for now sticking to our core scenario that the Fed will only start hiking its policy rate in 2023 but that the gap between the start of the taper and the start of the rate hiking cycle will be smaller than the 23 months gap in 2014-2015.Nevertheless, the Fed will want to engineer a slow landing – music to the ears of doves and bulls but arguably a concern for hawks fearful of the Fed and financial markets stalling. 

Powell Put in Play but Greater Challenges Ahead

United States

The US dollar is the official currency of the United States of America.

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