The markets pivot to Jackson Hole this week could obscure the underlying political Trump risk that currency markets have been feeding off. And while debate unfolds as to what Bannon’s removal means for the Trump administration economic agenda, it’s difficult to believe the answer to all that ails the West Wing, was a Steve Bannon departure.
Traders were looking to square positions ahead of Jackson Hole and even the subtle notion that Bannon’s departure would skewer the president's contentious ”America First” policies was signal enough ahead of the potentially Topsy Turvy Thursday when Jackson Hole summit commences. Overall one senses the FX markets are adopting a neutral to flatting bias in early APAC trade.
White House politics will remain in play, but given some of the outsized currency moves of late, it’s not too surprising dealers are paring short dollar risk as the shift to the Jackson Hole summit will put the focus back on Centeral Bank watch. And of course, dealers will start to factor in the best case calculus for the USD dollar. As unlikely as it may be, if the Feds provide a definitive balance sheet reduction date, and affirmation of a December rate hike we could have an abrupt shift in USD sentiment.
Japanese Yen
Given the North Korea Geo risk and the White House expanding quagmire, it’s difficult to view Friday’s move above 109.25 USD/JPY as little more than a dead cat bounce. But with the shift to Monetary Policy on tap as we approach Jackson Hole, market moves are more about risk paring than risk taking.
Euro
There’s been a lot of anticipation on whether ECB President Mario Draghi used the Jackson Hole platform to signal a change in ECB balance sheet policy. However, the unknown ECB sources threw cold water on the debate last week, and while the euro has remained bid on dips, it’s lacked any serious upward momentum since. And with the ECB minutes showing officials expressing concern over EUR strength, it’s hard to hard to see this view changing ahead of Thursday.
Australian Dollar
A highly debatable rebound in risk appetite saw the Aussie trading above the .7940 level into the weekend. From my seat, it looks more about weekend positions squaring rather than anything else. With the lack of fundamental drivers for the moment, best to pick your spots wisely and trade nimbly.