USD: Why is Jackson Hole So Important?

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Every year, central bankers and leading economists from around the world gather in Jackson Hole under the backdrop of Wyoming’s sweeping mountains to discuss economic affairs. This meeting between the world’s brightest financial minds and the most powerful policymakers is one of the most important economic events of the year. Like the G20 meetings, it is a forum where monumental decisions have been made and in recent years, more policy changes have been signaled or announced at the Jackson Hole summit than G20 meetings. Over the past few years, the Jackson Hole Summits have taken place during a time of tremendous uncertainty and this is year will be no different. The large black cloud of uncertainty that hangs over the U.S. and Eurozone economies faded slightly in recent weeks but still poses a major threat to the financial markets.

The decline in volatility, rally in stocks and fall in European bond yields alleviates some tensions in the markets, allowing central bankers to loosen their ties slightly, but there will still be a general mood of caution at the Summit. While the issues that have been haunting the global economy for the past year have not gone away, the choice of topic of this year’s conference “Achieving Maximum Long Run Growth” indicates that policymakers are no longer in firefighting mode. Whether this view is premature is debatable but it is clear that policymakers realize importance of long-term growth. With this in mind, a response to slow global growth or a solution to Europe’s sovereign debt crisis is not what investors are looking for on Friday August 31st.

Looking for Hints from Bernanke

Instead, investors will be looking to Fed Chairman Ben Bernanke for hints on U.S. monetary policy specifically. Recent developments have investors thoroughly confused about where the central bank stands on monetary policy. The minutes from the most recent monetary policy meeting revealed that the Federal Reserve was much closer to easing monetary policy than most people had anticipated and as a result, the dollar sold off aggressively. However confusion was created by the latest economic reports that showed improvements in job growth and consumer spending. While it may be clear that the Fed is disappointed by the recovery in the U.S. economy, the central question at hand is whether the FOMC minutes appropriately reflects their current views. If the dovish tone of the minutes turns out to be stale, then the dollar could recover quickly.

It will be up to the Fed Chairman to clarify the central bank’s stance but given Bernanke’s track record, we would not be surprised if he left investors even more confused. The fact of the matter is that Bernanke doesn’t have a clue about how sustainable the labor market recovery really is. Based on the latest jobless claims report, non-farm payroll growth could sink back to 100k. One month of satisfactory job growth and positive retail sales is not enough to give anyone, let alone central the bankers confidence that the U.S. economy is back on track. According to the CFTC’s IMM data on speculative positioning, dollar positions are practically neutral which means investors are not positioned one way or the other right now. If Bernanke sticks to script by simply reiterating the central bank’s pledge to do what is necessary for the U.S. economy, the market will be left guessing for a few more weeks. Given Bernanke’s track record, there’s a good possibility that he will provide no fresh clues on monetary policy, which would be a major disappointment.

Jackson Hole is Important But….

The market wants to hear Bernanke say yes or no to easier monetary policy in September. The Jackson Hole Summit has been Bernanke’s venue of choice for signaling major monetary policy change over the past 2 years. In 2010, Bernanke delivered his infamous speech that tipped off the market that QE2 was on the way and in 2011 he expanded the FOMC meeting from 1 to 2 days to outline the details for Operation Twist. Back in 2007, Fed leaders plotted their response to the budding financial crisis at Jackson Hole. This year, investors will be looking for hints on QE3. The Jackson Hole Summit is important but unfortunately, a third round of Quantitative Easing is an extreme monetary policy option that most Federal Reserve officials are not ready to make. As a middle ground, the central bank could opt to extend their low rates pledge from 2014 to a later date and combine it with a statement that pledges to maintain a highly accommodative stance as the economy recovers. They could also tie the low rate pledge to changes in the economy such as inflation or employment. However if the Fed were to make a monetary policy change, September would be a good time because the latest Fed forecasts would be completed. Bernanke is also scheduled to deliver his quarterly monetary policy press conference, which would give him an opportunity to answer questions about their decision.

While Bernanke’s speech on Friday is one of the most important event risks this month, there’s a reasonable chance that he won’t say anything new which is why currencies may trade quietly in the front of the week. For most Americans and Europeans, this week marks the unofficial end to summer and most traders will want to enjoy their time off before they have to focus on capturing those profits before the end of the year. Consumer prices, confidence and the Beige Book report are the only noteworthy U.S. economic reports on the calendar this week – none of which are game changes for the U.S. dollar. Nonetheless even if volatility is low, nerves will be high throughout the week as traders count down to Bernanke’s annual Jackson Hole speech on Friday.

Kathy Lien
Managing Director

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