The US Federal Reserve’s annual retreat to Jackson Hole,
Wyoming is always a headline-hitter. In 2010, Fed Chairman Ben Bernanke signalled
QE2 in his Jackson Hole address and hopes are sky high that he will usher in a
third round of quantitative easing tomorrow afternoon. Coupled with the
eurozone debt crisis, US monetary policy has been the market’s obsession for a
long time now.
The US recovery certainly hasn’t bounced back as expected
from the weakness prevalent in the first half of the year. However, US data has
been on an uptrend of late. We have seen monthly jobs growth improve for three
consecutive months, whilst housing figures and consumer sentiment have also
been on the up. In addition, data this week has revealed that the US economy
grew at an annualised rate of 1.7% in Q2, rather than the initial estimate of
1.5%. This won’t have gone unnoticed at the Fed.
The minutes from the Fed’s last meeting stoked QE3 earlier
bets this month, hinting that Bernanke & Co were preparing to act - “many
members judged that additional monetary easing would likely be warranted fairly
soon.” However, the wind was soon knocked out of the market’s sails when Fed
policymaker Bullard stated that the minutes were “stale,” pointing to the
upturn in recent US growth data as good reason for investors not to get ahead
of themselves.
Nonetheless, it is probably fair to say that the majority of
market participants are expecting Bernanke to signal QE3 tomorrow. It’s without
doubt an extremely close call but our bet is that he will fall short of this benchmark,
particularly in light of recent data. The Fed has various other policy options
at its disposal, such as giving guidance on how long he expects US interest
rates to remain “exceptionally low.” The bar has been set high though, only a
QE3 signal is like to satisfy the market’s appetite tomorrow.
What will be the market’s response to the absence of a QE3
hint? Well, equities will no doubt take a hit and commodities and precious metals
would follow suit. As for the dollar, well it should rally if Bernanke
disappoints. Even if Bernanke gives the market what it wants, with QE3 priced
in to the extent that it is, there is a good chance that investors will choose
to take profit on short-dollar positions, which again would strengthen the
greenback. With this in mind, we would prefer to be long of the dollar ahead of
Jackson Hole.
Richard Driver
Currency Analyst
Caxton FX
