Swiss Franc And Yen Remain Heavy As New Distractions Replace DPRK

The Japanese yen and Swiss franc remain heavy as the markets continue to shift away from the geopolitical risks. A return to the macroeconomic agenda is being deterred by new drama from Washington and reports suggesting that ECB’s Draghi will not be discussing the central bank’s monetary policy course at Jackson Hole confab, which will take place next week.   

Although Draghi will return to Jackson Hole for the first time in a few years, we did not see it is a likely venue for him to talk about what the ECB would likely do in a fortnight (September 7). Even though there is some precedent, we saw the decision about extending the purchases past the year end albeit at a reduced pace as being sufficiently nuanced that the ECB’s leadership would prefer home turf and an increased chance avoiding misunderstandings.    

Some suggest that the German Constitutional Court recognition of reasonable arguments that the ECB is overstepping its authority in QE operations would encourage the ECB to wind up its operations before the European Court of Justice hears the case. We do not think this is particularly likely. The German finance minister and the president of the Bundesbank quickly came out and supported the ECB against such charges. The ECB must act with the confidence that it is within its mandate until proven otherwise.  

In any event, the euro was knocked off its highs (~$1.1760) to session lows, just below $1.17. Over the last several sessions the euro has found new bids on a dip below the figure. It has happened three times in the past five sessions, and without a close below $1.17 since July 27. New buying emerged today as well. There are no significant options near current levels that expire today, but tomorrow is one the busiest days in months, with large options expiring at various strikes within the recent ranges.  

The euro was also weighed down as cross positions against sterling were unwound on news that the UK unemployment fell to a new generation (42 years) low of 4.4%. The claimant could fell 4.2k; while the June increase was pared to 3.5k from 5.9k. It was the first decline since February. The UK economy grew 125k jobs in Q2, which is better than expected (~100), but less than the 175k increase in Q1. Earnings growth still lags inflation but improved marginally. Average weekly earnings rose 2.1% (three months, year-over-year) up from a revised 1.9% pace in May (was 1.8%). Excluding bonus payment, weekly earnings also rose 2.1%, up from 2.0%.