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US Dollar Expected to Rise as Fed QE3 Hopes Fizzle at Jackson Hole

US Dollar Expected to Rise as Fed QE3 Hopes Fizzle at Jackson Hole

2012-08-31 07:36:00
Ilya Spivak, Head Strategist, APAC
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Talking Points

  • US Dollar to Rise as Fed’s Bernanke Disappoints Hopes for QE3 Signal
  • Yen Bought on Haven Demand as Asian Stocks Slump on Japanese Data

The US Dollar was little changed against its top counterparts in overnight trade as traders waited for Fed Chairman Ben Bernanke’s highly anticipated speech from at the Jackson Hole symposium. Traders hope the central bank chief will signal the intention of launching a third round of quantitative easing (QE3). The Japanese Yen outperformed as Asian stocks declined, boosting demand for the regional safe-haven currency. The MSCI Asia Pacific regional equity index fell 0.4 percent after Japan’s Industrial Production figures unexpectedly showed output shrank in July and Augusts’ Manufacturing PMI gauge showed the factory sector shrank at the fastest pace in 16 months.

The doves appear set for a disappointment, with an unequivocal nod toward QE3 unlikely to materialize.Core PCE inflation – the Fed’s preferred measure of price growth – sits well above levels that pushed policymakers into deflation-fighting mode at the onset of QE1 and QE2. Medium-term inflation expectationsalso appear reasonably anchored having crept higher over recent weeks from worrisome levels in early June. Funding conditions have likewise noticeably improved. The Bloomberg US Financial Conditions Index has recovered to levels unseen since the immediate aftermath of QE2 and bond yields are near record lows. US economic data has also performed increasingly better relative to expectations.

Taken together, this suggests the Fed is likely to reserve QE3 for the possibility thatEurozone debt crisis triggers another market-wide credit crunch akin to the aftermath Lehman Brothers’ bankruptcy of in 2008. The rapid approach of the so-called “fiscal cliff” likewise presents a possible scenario where another balance sheet expansion may be needed if US officials allow a jolt of arbitrary austerity to bludgeon the fragile recovery. On balance, the absence of clear guidance on forthcoming easing at Jackson Hole stands to weigh on risk appetite, boosting the US Dollar at the expense of stocks-linked currencies. The greenback may likewise score gains against the Yen, where prices remain anchored to US Treasury yields.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:01

GBP

GfK Consumer Confidence Survey (AUG)

-29

-27

-29

23:15

JPY

Nomura/JMMA Manufacturing PMI (AUG)

47.7

-

47.9

23:30

JPY

Job-To-Applicant Ratio (JUL)

0.83

0.83

0.82

23:30

JPY

Jobless Rate (JUL)

4.3%

4.3%

4.3%

23:30

JPY

Household Spending (YoY) (JUL)

1.7%

1.2%

1.6%

23:30

JPY

National CPI (YoY) (JUL)

-0.4%

-0.3%

-0.2%

23:30

JPY

National CPI Ex-Fresh Food (YoY) (JUL)

-0.3%

-0.3%

-0.2%

23:30

JPY

National CPI Ex Food, Energy (YoY) (JUL)

-0.6%

-0.6%

-0.6%

23:30

JPY

Tokyo CPI (YoY) (AUG)

-0.7%

-0.7%

-0.8%

23:30

JPY

Tokyo CPI Ex-Fresh Food (YoY) (AUG)

-0.5%

-0.6%

-0.6%

23:30

JPY

Tokyo CPI Ex Food, Energy (YoY) (AUG)

-0.8%

-1.0%

-1.0%

23:50

JPY

Industrial Production (MoM) (JUL P)

-1.2%

1.7%

0.4%

23:50

JPY

Industrial Production (YoY) (JUL P)

-1.0%

1.8%

-1.5%

1:30

AUD

Private Sector Credit (MoM) (JUL)

0.2%

0.4%

0.3%

1:30

AUD

Private Sector Credit (YoY) (JUL)

4.2%

4.4%

4.4%

1:35

CNY

MNI August Business Sentiment Indicator

47.54

-

49.73

3:00

NZD

Money Supply M3 (YoY) (JUL)

7.2%

-

5.7%

4:00

JPY

Vehicle Production (YoY) (JUL)

16.7%

-

20.3%

5:00

JPY

Construction Orders (YoY) (JUL)

8.0%

-

4.6%

5:00

JPY

Annualized Housing Starts (JUL)

0.870M

0.857M

0.837M

5:00

JPY

Housing Starts (YoY) (JUL)

-9.6%

-10.3%

-0.2%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP/ACT

PREV

IMPACT

6:00

EUR

German Retail Sales (MoM) (JUL)

-0.9% (A)

0.5%

Medium

6:00

EUR

German Retail Sales (YoY) (JUL)

-1.0% (A)

3.7%

Medium

6:00

GBP

Nationwide House Prices s.a. (MoM) (AUG)

1.3% (A)

-0.8%

Medium

6:00

GBP

Nationwide House Prices n.s.a. (YoY) (AUG)

-0.7% (A)

-2.6%

Medium

9:00

EUR

Euro-Zone CPI Estimate (YoY) (AUG)

2.5%

2.4%

Medium

9:00

EUR

Euro-Zone Unemployment Rate (JUL)

11.3%

11.2%

Medium

8:00

EUR

Italian Unemployment Rate s.a. (JUL P)

10.9%

10.8%

Low

8:00

EUR

Italian Unemployment Rate s.a. (2Q)

10.7%

9.8%

Low

9:00

EUR

Italian CPI - EU Harmonized (MoM) (AUG P)

0.3%

-1.7%

Low

9:00

EUR

Italian CPI - EU Harmonized (YoY) (AUG P)

3.6%

3.6%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (AUG P)

0.3%

0.1%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (AUG P)

3.1%

3.1%

Low

10:00

EUR

Italian PPI (MoM) (JUL)

0.3%

-0.1%

Low

10:00

EUR

Italian PPI (YoY) (JUL)

-

2.2%

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2474

1.2551

GBPUSD

1.5706

1.5850

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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