Here Comes Jackson Hole Volatility…

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Market Drivers August 25, 2017
IFO mixed
German GDP in line
Nikkei 0.51% Dax 0.19%
Oil $47/bbl
Gold $1287/oz.

Europe and Asia:
EUR German GDP 0.8% vs. 0.8%
EUR German Import -0.4% vs. 0.1%
EUR IFO 107.9 versus 106.8

North America:
USD Durable Goods 8:30
USD Yellen Speaks 10:00

Markets remained near motionless in Asian and early European trade as traders awaited the speeches from Jackson Hole that may provide clues to central bank policies into the end of the year.

On the economic front, the only material release was from Germany where the IFO survey was a bit better coming in at 107.9 versus 106.8 on forward expectations but the current assessment index was just a tad softer at 124.6 versus 125.00 eyed.

In addition, German GDP came in line at 0.8% but the import price index was softer at -0.4% versus 0.1%. The latter speaks to the deflationary nature of the appreciating euro and may be a key point of reference for Mario Draghi in his speech later today.

As we noted yesterday Mr. Draghi must walk a fine line of acknowledging that the QE program has largely served its purpose as Eurozone recovery strengthens, while at the same time not appearing so hawkish that the market front runs the ECB policy intentions and rips the EURUSD higher. ECB officials are loathe to see the EURUSD move beyond the 1.2000 level before the year end which could hurt exports and stifle the nascent recovery especially in the perimeter region of the Eurozone. Therefore the path of the EURUSD today will likely depend on whether Mr. Draghi stresses growth or deflation factors in his assessment of the Eurozone economy.

Due to time differences, Mr. Draghi’s will come almost on the close of the market and if it provides any rhetorical surprises the volatility could be massive given the thinness of the market at that time. So after several days of no movement, the EURUSD could see some quick spikes and dips as traders react to Mr, Draghi’s words.

Ahead of Mr. Draghi, the market will hear from Ms. Yellen who is not expected to address policy per se but may nevertheless reaffirm the Fed’s intention to hike rates in December. The dollar has been a bit softer against both euro and the pound as markets position for a relatively neutral tone from Ms. Yellen, but if she proves to be more forceful in spelling out the Fed’s intentions, the greenback could quickly climb above the 110.00 level in USDJPY.

Finally, even as Jackson Hole unfolds the market will watching another event in the US. Hurricane Harvey is expected to make landfall into the Gulf coast region of Texas – an area rife with oil refineries. The impact could be devastating if predictions of it Category 3 strength prove true. USDCAD has been sliding towards the 1.2500 figure all night long and if Harvey intensifies the decline in the pair may as intensify as well as traders begin to price in the impact to oil of any damage in the US refining capacity.

Boris Schlossberg
Managing Director

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