To say yesterday’s trade was luke-warm would be an understatement. Caught between another poor jobs number from the US and speeches from Janet Yellen and Mark Carney in the next 48hrs, most are prepared to reduce risk and look for opportunities as they present themselves instead of forcing the issue. Yellen’s speaking debut in her new role as Fed Chair will be the mood-setter for the week in all likelihood as we look to see whether recent ructions in emerging markets or two consecutive months of sub-trend payrolls improvements are enough to wobble conviction in the current plan to taper asset purchases through the year.
Firstly, while Yellen is likely to acknowledge those poor jobs increases in her testimony today, we are sure that the threshold within the Fed to once again change monetary policy is very high. Last year’s slips in May and June were due to the so-called ‘taper tantrum’ – the Fed will want to make sure their communication of policy to the market is better this year than last.
Forward guidance will see Yellen once again reiterate that interest rates will remain ultra-accommodative until unemployment is well below the 6.5% threshold that it currently finds itself rubbing up against. Friday’s jobs report saw unemployment slip to 6.6% although a decent portion of this must be a function of a declining participation rate.
Once again, we expect only passing comment to be made on the emerging market risk of the Fed’s plan. The Federal Reserve mandate relates to its operations and necessary responsibilities to the US economy. Nixon-era Treasury secretary John Connolly told European Finance Ministers that the US dollar was “our currency, but your problem” and that rationale exists to this day. I don’t think the Fed will amend its policy of asset purchase reduction if the issues remain in the emerging market. There are two emerging market economies that have the potential to alter this but this would only be as a result of falls in trade between them and the US; these countries are China and Mexico. No other EM economy is really on the US’s radar.
It’s always nice to debut comment on a new currency in the morning update and today we welcome the Kazakh tenge. The Kaazakh centrela bank, in response to emerging market pressures caused by the Fed’s reduction in asset purchases, decided to devalue their currency by 19% overnight. Now, the tenge is unlikely to cause a flood of fear throughout the market as a result of this move, but it will do little for emerging market confidence going into Yellen’s testimony.
Yellen will release a statement at 13.30 GMT before starting her testimony at 15:00.
Sterling has continued its post-payrolls rally this morning after the British Retail Consortium reported that like-for-like retail sales jumped 3.9% from a year earlier after increasing 0.4% in December. These levels are likely to be close to near-term highs before Carney’s speech at the Quarterly Inflation Report tomorrow and the outlining of a new forward guidance policy.
Have a great day.
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