“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctlyâ€.
Woody Allen’s words must have seemed particularly relevant to those gathered at Jackson Hole last week. With the major economies following wildly divergent paths, central bankers are struggling to choose from a number of generally unattractive monetary policy tools – leaving market participants to pray that they have the wisdom to choose correctly.
The euro is down sharply to kick off the week, after Mario Draghi suggested that his central bank stood ready to ease policy further in the event that inflation continues to fall. Traders took this as a sign that some form of quantitative easing could begin in the coming three quarters, in sharp contrast with Janet Yellen’s recent hawkishness. This combined with the collapse of the French government to clobber the short end of the European yield curve.
The yen also took a beating, delivered by Bank of Japan Governor Haruhiko Kuroda, who said that monetary easing would continue until the deflationary dragons that have long stalked the country are well and truly slain.
Turmoil in the currency markets had little impact on crude oil prices however. With supplies continuing to rise against a lacklustre demand backdrop, prices appear to be on a slippery slope – West Texas tea is trading near the $93 handle while Brent is rapidly approaching $100. Brent is down almost eight percent this year, despite a generalized rise in geopolitical tensions across its critical production zones.
The Canadian dollar remains on the defensive, after Friday’s lower-than-expected inflation number delivered a shock to market bulls. Reports of an impending marriage between the U.S.-based Burger King group and Canada’s Tim Horton’s chain are doing little to support the currency. Without judging the merits of getting Double Whoppers alongside our double-doubles, we suspect that the deal will do little to boost demand for the loonie in the short term.
Traders are now positioning for the week ahead, with tomorrow’s US durable goods report, and Thursday’s gross domestic product numbers likely to cause the most movement. Weakness could trigger a reappraisal of the Federal Reserve’s tightening plans, while continued strength would steepen the yield curve in the dollar’s favour.
With the dog days of August soon over, the risk of market turbulence is rising – September has historically been a month in which participants adjust their positions and reassess the longer-term outlook, meaning that corporate treasurers should be preparing for a return to normalized conditions in the weeks to come. Have a great week, and enjoy the calm while it lasts…
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