Mid-range is the word on the street for currency markets

Currency market in consolidation ahead of Jackson Hole

Despite there being plenty of noise over the past week for currency markets, most lie in the middle of their two-week ranges this morning. Notably, EUR/USD, USD/CHF, USD/JPY and AUD/USD amongst the major currencies, seem to be waiting for a Federal Reserve green light before resuming their rallies versus the greenback. One exception is Her Majesty’s British Pound, which is shrugging off zero Brexit progress and is lurking at 1.3210 this morning. A daily close above 1.3270 heralds further gains to 1.3500 in the near-term.

Across regional currencies, the story is similar, although there are exceptions. An apparent temporary thawing in US/China trade relations has led to a series of stronger PBOC CNY fixes. USD/CNY has fallen to near 8-month lows at 6.8850 this morning. Assuming that nothing blows up on the US/China trade front, (a big if), USD/CNY looks poised to test its 2020 lows of 6.8400 sooner rather than later.

Across regional currencies, MYR continues to outperform, while the SGD, THB and PHP consolidate their recent gains with the global recovery story still on track with investors. The region’s laggard, the Indonesian rupiah, is being given a helping hand by the central bank today. The Bank of Indonesia is in the market selling USD/IDR this morning. Gains by the IDR remain limited, though, as President Jokowi appears to have gone all-in on a vaccine solving his Covid-19 problem and the ensuing dire economic fallout.

Overall, currency markets are likely to remain in consolidation mode ahead of the Jackson Hole speech this evening. Financial markets are expecting Fed Chair Powell to hint that lower rates will continue, and most importantly, to allow inflation targets to overshoot so as to boost average inflation levels. The twin goals seem incongruous though, as it is difficult to imagine the Fed allowing the yield curve to steepen in a significant fashion. Powell’s speech may be the first hint of yield curve control as well, just don’t call it yield curve control.

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