The big themes last week were weakness for the dollar, strength of precious metals and foreign currencies, as well as cryptos. Bitcoin managed to extend its gains over the weekend, finally clearing the $50K hurdle cleanly. There hasn’t been much in the way of any fresh news for crypto currencies. They are continuing to find support because of momentum buying - people buying because prices are rising, hoping to sell back at even higher prices. Not much has changed for other markets either, although global stocks have rallied sharply, with European indices being up around 0.5% to 1% this morning after being stuck in holding patterns last week. With the US markets closed in observance of Labor Day, there won’t be much to look forward to in the afternoon.
Source: ThinkMarkets and TradingView.com
Will the dollar selling continue?
Last week saw the dollar drop sharply. This was in response to some soft US data and after Jerome Powell had watered down the Fed’s hawkish tone a little bit at the Jackson Hole Symposium. The major US data releases disappointed throughout the week, which culminated with the publication of a poor nonfarm payrolls report on Friday, triggering further weakness in the greenback and causing precious metals to rally. The US economy only managed to add 235K jobs in August, when 720K was expected. While this is clearly a setback, I don’t think it is a game changer insofar as the Fed’s policy is concerned. Thanks to the past sharp improvement in US jobs data, I reckon the Fed is still on course to announce the timeline for tapering QE at the November or December meeting, but the poor data certainly boosts the narrative that the Fed is going to ease off the QE gas even more gently.
As we head deeper into the last month of the quarter and get nearer to the business end of the year, volatility should pick up after the quieter summer period.
November or December?
Investors will keep a close eye on the Fed’s policy response, which will depend on incoming data and the situation with the virus. Although many people expect the Fed to announce its tapering plans in November, it is important to note that the FOMC will only have one more NFP report to work with until then. The next policy meeting is on November 2, but the jobs report won’t be out until two days later, on 5th
of the month. So, this may mean tapering could be delayed until the December meeting – especially if we see further weakness in incoming US data or if inflation pointers weaken. In other words, there is a risk the Fed’s ‘substantial further progress’ condition won’t be satisfied to justify tapering by the Fed’s November meeting.
Three major central bank meetings, but expect no policy changes
But in as far as the week ahead is concerned, well in light of the recent improvement in Eurozone data and some hawkish commentary from a couple of ECB officials, the EUR/USD could further extend its gains ahead of the ECB meeting later in the week, now that the US jobs report has disappointed expectations. It is also worth watching gold, now that it has cleared several resistance levels, including $1820. The weakness in the dollar could provide further fuel for the crypto rally.
The week ahead features three major central bank meetings. The RBA, BoC and ECB are all expected to keep their respective policy stances unchanged.
: The Reserve Bank of Australia decision must decide whether or not to stick to its taper plan in light of ongoing lockdowns of nearly half of the Australian population in its two most populous cities.
In Canada, the upcoming federal election means the BoC won’t be making any changes, but the USD/CAD could decline further as the BoC is likely to remain comparatively hawkish, and in light of the renewed strength in crude oil prices.
As far as the ECB is concerned, well I can’t image President Christine Lagarde will have changed her dovish stance much, even as some ECB members have spoken in favour of ending PEPP in early 2022 amid the strength in Eurozone data. Still, any slightly change in her tone should keep the euro’s recent strength intact.
On Monday, the North American markets will be closed in observance of Labor Day in the US and Canada. This should make for a quitter day, although we will have further data from the Eurozone to take into account with German factory orders and Sentix investor confidence data among the highlights.