FX Daily: Short covering ahead of Powell’s speech

Many currencies to return past week’s gains.
Philip Wee27 Aug 2021
    Photo credit: Unsplash Photo

    In line with our expectations, markets reckoned they might have been too hasty in brushing aside the Fed’s Jackson Hole Economic Symposium as a non-event. Major US stock indices did not post fresh record highs today. Dow retreated 0.6% while S&P 500 and Nasdaq Composite lost 0.6% each. Barely a week out, Dallas Fed President Robert Kaplan became less concerned about the Delta-variant and dropped his misgivings over a Fed taper announcement in September. His call was backed by Kansas Fed President Esther George who cited strong US jobs data.  St Louis Fed President James Bullard worry that delaying the taper might lead to more aggressive actions later to curb inflation. 

    Fed Chair Jerome Powell will probably set the tone with his speech today at 2200 SGT. Some believe he will offer few clues because he is up for reappointment for a second term. We disagree. First, Powell’s reappointment is supported by US Treasury Secretary Janet Yellen. Second, some US lawmakers indicated at Powell’s congressional testimonies last month that the Fed should start pulling back its pandemic stimulus which they see fuelling consumer and asset inflation. Moreover, the US Treasury Department is scheduled to reduce the size of government issuances from November because of lesser funding needs for economic relief efforts. It was probably no coincidence that markets gravitated towards November for a taper announcement.


    Today will be about short covering. The currencies to avoid were those that performed best over the past week, namely, commodity currencies such as the AUD, NZD and CAD. JPY should depreciate above 110 per USD if the US 10-year treasury yield pushes above 1.35%. CHF will likely drift lower with EUR and GBP. In Asia, THB, MYR and PHP should depreciate back above their key levels at 33, 4.20 and 50 per USD respectively. With the USD moving higher against its basket of currencies, SGD will be looking to depreciate to 1.36 per USD again.

    Philip Wee

    FX Strategist - G3 & Asia
    [email protected]

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