Most of last week was quiet in financial markets with the key focus always being Friday’s Jackson Hole Symposium.
So after a sleepy week, markets were kicked into life following Fed Chair Yellen’s speech, but it proved to be Vice-Chair Fischer’s subsequent comments that resulted in a sustained market reaction, namely a stronger USD.
The headline soundbite from Yellen’s keynote speech was “…in light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”.
While that triggered a stronger USD, higher rates and lower equity prices, once the market sifted through the detail, there was enough offsetting dovish comments to suggest that nothing had really changed, and the initial market reaction soon washed out.
Importantly, Yellen offered no specific guidance on the timing of the next rate hike and she conveyed enough uncertainty about the outlook to suggest that it would be back to watching the data. Much of the rest of the speech was devoted to how the Fed could respond in the next downturn and it made for some sobering reading.
Fed Vice-Chair Fischer seemed to have more market impact when he commented in a TV interview that Yellen’s comments were consistent with a Fed that could hike rates in September, as well as a second time this year.
That comment was enough to drive the USD much higher, and on various indices it ended up about 0.8%.
The NZD ended down 0.9%, one of the worst performers, closing the week near its lows for the week at 0.7236. Earlier in the session, before Fischer hit the screens, the NZD had reached as high as 0.7378, so it was a pretty savage fall.
We’ve previously noted that the outlook for US monetary policy remains the key driver of the NZD and an assumed Fed hike later in the year, most probably December, is required to get the currency back down towards the 0.70 mark. Without the Fed in play, the NZD could easily push higher.
Other currencies followed a similar pattern to the NZD, with the AUD down 0.7% to around 0.7565, EUR down to around 1.12 and USD/JPY up to 101.85. GBP was one of the better performers, but still fell by 0.4% to 1.3140.
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