All Eyes On Jackson Hole

 | Aug 25, 2016 07:37AM ET

Forex News and Events

Central bank credibility at stake

Should we really expect something big to come from tomorrow’s Jackson Hole Policy Symposium? The Fed will, as usual, provide hawkish comments and hints that “a possible rate hike” before year-end is possible. Of course this will never happen, which is why investors are now very suspicious of the Fed and the normalization of interest rates. The major issue is that the US central bank needs inflation to kill its massive debt, currently above $18 trillion, before raising rates as well as a strong labour market. But, our view is that US economic health is overestimated. Indeed, unemployment tax receipts, aimed at funding the state workforce agencies by companies, have fallen over the past 4 years. This contradicts the notion that the US economy is actually creating jobs.

In Europe, the ECB is conducting a very aggressive monetary policy, spending at the pace of around €1 trillion per year to stimulate the economy when recent data came in at a decent level. Inflation has risen 0.4% in the last four months and PMI is still above 50 (signalling expansion) for August. The ECB is all-in while according to data, the Eurozone economy is not in a recession.

Looking to Japan, it is hard to see how things can end well for the BoJ. The central bank is now a major shareholder for one third of all companies trading on Japan’s major index, the Nikkei 225. On top of that, according to data, Japan is not even in a recession cycle but its monetary policy is simply huge and markets have already started to price an increase in the annual bond-purchase target from yen 80t to 90t. On the USD/JPY, we are clearly bearish as from our point of view, the BoJ will lose all the gains it had during the era of Abenomics. A target of yen 90 for one single dollar note within the medium-term is likely.

Gold to shine again

Gold has been the main focus of attention in the markets since the beginning of the year as investors became increasingly nervous about the apparent inefficiency of ultra-accommodative monetary policies on financial markets. Indeed, central banks have been struggling not only to drive efficiently their respective currency but also to revive growth. In such an uncertain environment, investors turned to the yellow metal, boosting its price by roughly 30% at around $1,300 an ounce. Against the backdrop of weak global growth outlook and eroding confidence in central banks, we expect gold to continue grinding higher over the long-term even though the price action will be subject to some wild swings.

EUR/CHF - Stalling Below 1.0900.