Morning Brief: Monday August 31

Even with thin month conditions and a UK holiday today, a very busy week awaits us with rate decisions from the RBA and the ECB, GDP data from Canada and Australia, ending with payroll numbers in the U.S and Canada.

Concerns over global growth, the plunge in commodity prices, China’s violent equity markets and its recent currency devaluation has suggested a possible change in the Fed’s rate normalization timetable. But, with US economic data remaining positive with a sharp upward revision in their growth forecasts for Q2 (+3.7% vs. +2.3%), the market was looking to the Fed over the weekend for guidance.

Jackson Hole

The first rate increase by the Fed in nearly a decade is a close call.

Door remains ajar for Fed to hike: Fed did not rule out the possibility of the first Fed hike in a decade beginning next month.
Fed Vice-Chair Fisher: Good reason for inflation to move higher and that U.S policy makers should “not” wait until inflation is back at their +2% level to begin tightening. Fischer did acknowledge some recent market volatility and China slowdown, but was also skeptical that there’s causality in China market turmoil from Fed tightening expectations.
On inflation: Fischer said energy price decline is a “one-off temporary factor,” suggesting the Fed will seek to avoid the perception of being behind the curve.
Conclusion: U.S Policymakers have maintained the view of an improving U.S economy and jobs market, which is making it more difficult for the “doves” to find much support.


As China’s economic slowdown and a possible Federal Reserve interest-rate increase roil global markets, currency traders are treating the yen and the euro as havens of choice as risk aversion trading again starts the week off.

Global equities are expected to close out the worst month of trading since the summer of 2011 with losses of over -$5T.
Goldman Sachs has adjusted China 2016 growth targets down to +6.4% vs. +6.7%.
China regulators continue their efforts to generate liquidity and ease financial strain, but the Shanghai Composite is a notable laggard to start this week. Putting pressure on the Shanghai indices is market speculation that the Chinese government has abandoned measures to boost the stock market after spending as much as $200B over the past two-months.
China Premier Li saw the economy within “appropriate range”, but acknowledged traditional drivers for growth are not as strong, requiring more support in public goods and services sectors.
Chinese regulators will instead focus on investigating institutions that obstructed government measures.
Investors to focus on Chinas manufacturing data for August on Tuesday
China’s fear over capital flight seems to be preventing a more aggressive policy stance by the PBoC.

Loonie caught between oil price gains, Fed hike bets

This week’s Canadian GDP and labor data are unlikely to make a case of changing rate expectations. This should allow the BoC to stay on the sidelines until after the elections. The CAD is expected to remain hyper sensitive to oil prices changes.

Technical Recession: Canadian GDP Tuesday. Canada contracted -0.2% in May (fifth consecutive month of decline). The BoC estimated that GDP would decline -0.5% in Q2, after falling -0.6% in Q1. Governor Poloz is hoping that a softer CAD and lower interest rates (+0.5%) will boost economic activity in the H2. Market is looking for a solid GDP gain in June. with the Canadian economy expected to grow by +0.3%.
Canadian employment data Friday: Canada added +6.6k jobs in July, rebounding after a similar decline in June. However, the jobs addition did not alter the unemployment rate, which remained stuck at +6.8%. The majority of the positions added in July were part-time. Canada’s labor market is expected to cut -2.5k jobs while the unemployment rate is forecasted to remain unchanged at +6.8%.
Oil prices: Climbed +12% last week, the biggest advance since February 2011, though they are still down -15% for the year on concern a supply glut will persist. Technical speculators continue to dominate. Is this crude rally sustainable despite global growth concerns? Bear speculators continue to talk about a $25-30 print.
Loonie: Remains vulnerable to gyrations to commodity price changes and U.S rate differentials. The underlying trend is for a weaker CAD. Loonie bulls continue to look for stronger signals.

ECB and Fed

The ECB Governing Council meets in Frankfurt on Thursday while the Fed’s policy-setting committee gathers on Sept. 16-17. Both banks are short of their +2% inflation targets. Euro-zone inflation was +0.2% in July, while the price gauge favored by the Fed rose +0.3% in the 12-months through July.

ECB Thursday:Interest rates have reached their “lower bound” according to the Bank and QE is achieving some results in monetary easing-a weaker EUR.
Global growth worries persist: Will the ECB announce an acceleration of its QE program beyond +€60B p.m. or its time frame beyond September 2016? ECB may have to consider a more dovish rhetoric in order to prevent inflation expectations from falling further.

Rate differentials to support the USD

A September rate hike  by the Fed remains a close call. Currently, there is much global uncertainty and U.S. markets have been volatile amid concern over slowing growth in China, but another constructive payrolls reading this Friday should keep the Fed on track with considering higher rates ahead of the end of the year or even in September.

US Non-Farm Payrolls Friday: July payrolls added +215k jobs after a solid +223k in June. The unemployment rate remained steady at a seven-year low of +5.3%. The Fed has upgraded its assessment of the labor market, describing it as continuing to “improve, with solid job gains and declining unemployment. August’s new jobs addition is expected to be +220k while the unemployment rate is forecasted to decline to +5.2%. Market will be looking to the wage growth component. to convince them that the Fed needs to act in September to get ahead of the curve.

Forex heatmap

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell
Dean Popplewell

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