Opening the toolkit?
As we wait on Friday’s speech from Fed Chair Janet Yellen, traders are using any piece of knowledge they can get their hands on to glean what the world’s most powerful woman may end up saying. Yesterday however she released the title of her speech – “The Federal Reserve’s Monetary Policy Toolkit” – which could hint at some rather dovish undertones.
Previous Federal Reserve speeches that have referenced a toolkit have hinted at the Bank’s ability to offer accommodation to the US economy, and that has allowed the dollar to weaken through yesterday’s European, US and the overnight Asian session.
Wheeler and risk
Markets had started the day in a generalized good mood and pushed risk assets higher through the session. A speech by Reserve Bank of New Zealand Governor Wheeler has helped lift the NZD as well as other APAC currencies against the greenback. Wheeler told reporters that the New Zealand economy, while needing additional rate cuts from its current record low, would not be getting them in rapid succession.
Wheeler told reporters: “We (the RBNZ) do not believe that the outlook and balance of risks warrants a position of no policy change, nor a position of rapid easings. Rapid ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market.”
While additional rate cuts may now be likely, the probability of one happening at the Bank’s meeting next month have dropped. Language around intervention in an overly strong NZD was also missing from his statement and has allowed the kiwi dollar further room to the upside. Similar strength has flown into the AUD through the Asian session too.
Are manufacturers taking advantage of the weak pound?
Sterling also improved on the session yesterday ahead of today’s CBI trends survey. This is the second reading of manufacturer confidence since Brexit, the first saw a drop to levels not seen since the 2009 recession.
Consensus estimates believe that this confidence indicator will once again dip in August, although positivity may be found should the weakened pound have already started to flow through to exporters’ order books.
The Day Ahead
The main news of the session will be the preliminary PMIs from the European and US economies to give us a more present view of what is going on there. There has been little news of late to dissuade us from the belief that Germany is in the midst of a slow recovery whilst France remains largely stagnant.
Elsewhere the data calendar is pretty quiet, although US confidence may be interesting given the recent slide in retail sales and as we get closer to the US election.