Week In FX Americas – Yellen uninspiring, Russian moves in focus

Capital Market remains on high alert as they try to decipher the subtle clues from Fed Chair Yellen’s speech at Jackson Hole Economic Symposium and Russia’s latest military moves on the Ukraine border.

In respect to the Fed, dealers are looking for a timeline on the possibility of US policy makers tightening current monetary policy. To investors, US policy is pretty much set in stone with zero-interest rate policy and quantitative easing. They see very few other options, unless the Fed wants to crash equity markets.

The initial take way from Ms. Yellen’s Wyoming speech is that there is not anything particularly groundbreaking. Just like within the Fed, the markets will be “openly” debating for sometime, the various changes and innuendos that she has given up at Jackson Hole.

She is acknowledging that the assessment of labor market is especially challenging recently and that gauging labor market slack needs to be “more nuanced”. That said, she still believes that there is significant under-use of labor resources. Her speech seems to have been “neutral” rather than outright “dovish.”

She is not all that negative on the labor market. All along, she has stated that “wage moves have been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.” Nevertheless, the market needs to interpret accurately, the difference between “structural and cyclical” unemployment from the Fed’s perspective, to wholly understand the Fed’s timing on acquiring ‘normalcy’ rates. Her speech certainly highlighted that she does remain unclear on how much labor slack is remaining, and that any tightening is data dependent.

For every strong point that Ms. Yellen made on Friday morning, she was able to counteract this with another in the opposite direction. By day’s end, her Jackson Hole speech is “full of if’s, but’s, could and might’s” reflecting the uncertainty of labor slack.

The market will be debating the Yellen’s labor fallout for a while, but for now, Russia’s new aggressive stance over Ukraine will be expected to take priority as we head into the weekend.

What to expect next week

The UK starts the week off with a Bank holiday, while investors will be getting a peek at German business climate conditions, new home sales data stateside, and trade conditions from the Kiwi’s. The market will be openly debating what transpired in Jackson Hole, while nervously waiting on Russia’s next move. In the US, investors will have consumer confidence and preliminary GDP to contend with mid-week. Closing out the week, the short-term fate of the loonie will be influenced Friday’s GDP release.

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