August 31st, 2015 5:35 am | by John Jansen |

Via Kit Juckes at SocGen:


Welcome to August Bank Holiday Monday in London. Yesterday, in blazing sun, La Vuelta sped by the cafe I’ve used as my base for breakfast and sending out comments over the last couple of weeks but the time has come to face the music, or rather the rain.  Let’s get long dollars and short Asia for September.

The Chinese Government’s decision to stop large-sale share purchases in order to boost the equity market, resulted in a relatively modest fall in local equity prices and a generally risk averse session in Asia. The wait for Friday’s US labour market report has been spiced-up by a hawkish tinge to Fed vice-Chair Fischer’s comments at Jackson Hole and 2yr Treasury yields are back up to 72bp, where they were two weeks ago before last Monday’s equity market slide. That’s taken the 2yr rate differential between the US and Germany back up too but it doesn’t really clear the air, just leaves us waiting for the FOMC meeting in two weeks’ time as the main driver of trends. With an expectations of robust US data, we expect the dollar to be ‘bid’ in September although further weakness in commodity prices and continued equity market volatility may still mean this is more visible in G3 gaining vs ‘the rest’ than in intra-G3 moves. Still, if better US data does send short-dated US yields higher, the dollar should be the pick of the G3 and we like being long vs CAD and NZD


The two most notable takeaways from the Jackson Hole Symposium are in the links below. That’s not to belittle the rest of the conference, but Gita Gopinath’s paper concluding U.S. inflation is relatively insulated from exchange rate shocks, while other countries are highly sensitive to it has been much discussed in social media over the weekend, while Stanley Fischer’s thoughts on monetary policy were inevitably the main source of news headlines.



Mr Fischer, in a nutshell, gives the impression of being inclined towards an earlier start to the rate hiking cycle than a later one, while emphasising the gradual nature of the moves. If you simply re-priced the rate path of his comments, you’d sell the front end of the US curve and buy the intermediate/longer end.

The Gopinath paper has left me pondering how to untangle the effect on inflation of an exchange rate adjustment and that of a fall in oil or commodity prices. A strong dollar doesn’t cut US import prices because imports are invoiced in dollars but a strong dollar correlates massively with falling commodity prices and those do have an impact on inflation. By the same token, the upward pressure on Japanese prices of a weak yen is offset by falling commodity prices, and so on. Not that it changes much for the US, where the core PCE deflator’s running at 1% y/y and wage growth is at 2.1%.

Today, the US Chicago PMI (exp 57.5 vs 54.7) is likely to be  eye-catching. The Milwaukee ISM and the Dallas Fed index are due too, Overnight tonight, we get the Chinese PMI (exp 49.8), an RBA meeting, and Australian balance of payments data (current a/c deficit of AUD 6bn won’t help the currency).

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