EURUSD Up on US Confidence and ECB Absence

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The U.S. dollar is trading lower against most of the major currencies this morning with the exception of the New Zealand dollar. According to the Conference Board consumer confidence fell sharply in the month of August. The index dropped from 65.4 to 60.6, its lowest reading since November 2011. This pullback suggests that the increase in job growth and rise in stocks has done little to ease the nerves of U.S. consumers. While Americans did not change their current outlook by much, their expectations declined steeply. This is discouraging but this report is at odds with the University of Michigan consumer sentiment index, which showed an improvement in confidence this month. According to S&P Case Shiller, house prices rose 0.94% in the month of June. While this pace of growth was slightly weaker than the past month’s rise, it was double market expectations. Taking the upward revision to the May figures into consideration along with the recent rebound in existing and new home sales, the housing market is stabilizing thanks to the recovery in the stock market and low interest rates. This week’s U.S. economic reports are a sideshow to Bernanke’s Jackson Hole Summit on Friday. While the decline in consumer confidence and stronger than expected rise in house prices are confusing, these are not the main pieces of data that drive U.S. policy. The performance of the U.S. dollar over the past 48 hours suggests that investors are at a loss on whether Bernanke will drop any clues about future monetary policy. According to last week’s CFTC IMM data, speculative positioning in the U.S. dollar is close to neutral and we don’t believe positioning has changed much since then. We continue to believe that Bernanke will let the market down and skirt around the issue of more easing because the central bank will want to see how non-farm payrolls print next week before making any monetary policy commitments.

This Friday’s Jackson Hole Summit will be very U.S. centric with the absence of Eurozone policymakers. It was announced this morning that ECB President Draghi will be a no-show in Wyoming. He canceled his trip to the annual meeting of central bankers due to “a heavy workload in the coming days.” The European Central Bank is hard at work ahead of their September 6th monetary policy meeting and as we wrote in Monday’s note, the ECB is up to something big. In early August, the central bank pledged to provide a new framework for open market operations (translation: bond purchases). With no other executive board members of the central bank taking his place at Jackson Hole, it is clear that they want every able body ECB member to remain in the region and involved in outlining the details of the plan. With the cancellation of Draghi’s trip to Jackson Hole, the ECB has set the market’s expectations for a major policy announcement next Thursday. The EUR/USD is trading higher in anticipation of additional support from the ECB. The central bank is widely expected to unveil a new bond purchase program aimed at the short end of the curve. Intervention in the bond market would reduce the risk premia by driving Spanish and Italian bond yields even lower.

Kathy Lien
Managing Director

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