By Jane Foley, head FX strategist at Rabobank
Central bankers who had been expecting to be visiting the Grand Teton National Park, just outside Jackson Wyoming, this weekend will instead be staying put. The Fed’s annual symposium will now take place virtually “due to the recently elevated Covid-19 health-risk level in Teton County”. Fed Chair Powell will still deliver his remarks on the economic outlook on Friday, but the audience will have to tune in the Kansas City Fed’s YouTube channel to watch. Having anticipated this gathering of central bankers for so long, the event could prove to be a damp squib for Fed watchers.
The market had already started to suspect that the Delta variant may impact the Fed’s plans, though not necessarily in this way. On Friday the Fed’s Kaplan remarked that he was watching the Delta variant and that he may need to adjust his view if it slows US economic growth materially. Kaplan stated that for now he was leaving his forecasts unchanged. If growth plays out as he is currently forecasting, Kaplan stated that he would still support an tapering announcement from the Fed next month, to start in October.
By implication, the worsening in the number of Delta cases would support calls for a later tapering announcement. In the remainder of the year, FOMC meetings are scheduled for September, November and December. Following the disappointment around the Jackson Hole venue, better news for Fed Chair Powell has come with the news that US Treasury Secretary and former Fed Chair Yellen supports his re-appointment for a second term. A decision by Biden is expected next month.
Data from the US Center for Disease Control and Prevention has led to some reports that Covid cases in part of the US Northeast may be near the peak of the current wave. That said, there are concerns about the re-opening of schools in the US and about return dates for office workers. Several large US companies has announced they are postponing return dates again, some to early next year.
Overnight Asian shares have bounced higher by the strongest level for three weeks as bargain hunters take advantage of the recent sell-off. Last week the weakness in stocks and energy markets reflected fears about the impact Delta may have on global growth, though Asian markets have been feeling the impact for longer. Japanese, Chinese and Australian growth forecasts are among those that have been pared back in the recent weeks with lockdown announcements playing a significant part. For Australia, state leaders are disagreeing about whether it is realistic to maintain the zero Covid policy, with PM Morrison appearing to acknowledge that Australians will have to learn to live with the virus. This week is it likely to become clear whether Covid has also irreversibly slipped through New Zealand’s tight border controls. Encouragement has come from China this morning with the announcement that its zero tolerance approach to Covid has brought its local cases back down to nil.
In tune with the better tone in stocks, the USD has given back some of its recent safe haven gains along with the JPY and the CHF. The commodity currencies, CAD, AUD and AUD are at the top end of the G10 FX performance table this morning.
