Central Banks Steal the Headlines Ahead of Jackson Hole | Daily FX Commentary

• RBA testimony confirms neutral policy bias, Aussie under pressure on stronger Greenback;
• BoE policy makers split as Weale and McCafferty voted for a rate hike in August;
• FOMC minutes read hawkish as more Fed officials see light in recent jobs gains.

In yesterday’s semi-annual testimony, Glenn Stevens has once again cited caution, suggesting growth will likely be below trend in the coming year given that unemployment is unlikely to fall in the near term from the 6.4% annual rate recorded recently. Once again, the Governor of the RBA has attempted to talk down the Aussie dollar in a similar fashion to previous attempts, citing that the risk of a fall in the local currency is ‘underappreciated’, however it is becoming increasingly evident that for as long as the RBA retains a neutral bias, such comments will be discarded by the market and the Aussie will remain comfortable at current levels. Stevens is a firm believer that the Aussie dollar will weaken at some point but is understandably unable to say when as a higher yield remains attractive to foreign investors. We are of the opinion that it will likely stay this way until markets have some definitive guidance of foreign Central Bank rate increases which will inevitably make the carry trade that little less attractive.

I wrote yesterday that key Sterling risk events had passed for the time being, and any indication that the MPC are turning more hawkish on raising interest rates would be deemed as positive for the pound. Expectations of one or more members of the MPC to have voted for a rate hike in August were quashed after the BoE quarterly inflation report. However, minutes from the rate decision meeting have painted a slightly different picture with two unlikely members expressing dissent amongst policy makers and voted for a rate hike this month. The news is certainly short-term positive for the pound but it is unknown whether, at the time of voting, policy makers had managed to catch an early glimpse of weak wage growth data announced last week. Whilst bullish bets in the pound have bounced from lows overnight, the market remains aware of the May UK elections, many institutions not expecting the Bank of England to move until these have commenced.

In light of recent jobs gains across the US, minutes from the FOMC meeting showed some policy makers to be turning slightly more biased towards rate increases, a hawkish set of minutes saw the greenback rally across the board. Policy makers noted strong labour market performance this year and the significance of this when it comes to tightening monetary policy, an all-round positive for the US dollar. There is a sense that markets don’t want to run too far with these minutes as they don’t take into consideration recent geopolitical and economic events, but they have certainly provided a slightly brighter policy outlook as we head into the Jackson Hole conference over the next two days.

[B]Tom Williams
Currency Analyst[/B]