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Market Briefing: Dollar Bulls Start Feeling A Little Hawkward

The greenback is retreating as bullish dollar sentiment softens ahead of tomorrow’s central bank meeting in Jackson Hole. Commodity-linked and high-beta currencies are climbing on the prospect of more stimulus from China, and the euro and pound are inching up on a broader sense of optimism – even as benchmark European energy prices break new records.

Mr. Powell is expected to outline a policy path that takes rates into restrictive territory and keeps them there as the central bank responds to post-pandemic shifts in the global economy. In keeping with the academic nature of the conference, he is likely to explore demographic changes in the labour markets, how globalization is evolving, and whether supply chain shocks are a permanent part of the new normal.

Subtle shifts in language could have major implications for interest rates and volatility expectations are remarkably high ahead of the speech, suggesting that investors expect big moves across a range of asset classes in response to Mr. Powell’s words. These worries could be borne out in reality — the Jackson Hole conference has provided a platform for several important policy shifts in the past. But investor concerns also prove unfounded – markets have gotten themselves into a high dudgeon ahead of the event in prior years, only to be disappointed.

Oil prices keep inching up as more countries support Saudi Arabia’s call for a production cut. Since Saudi Energy Minister Prince Abdulaziz bin Salman’s comments on Monday, Algeria, Congo, Equatorial Guinea, Iraq, Kuwait, Libya and Venezuela have all issued expressions of support for the idea – although this should be taken with a grain of salt, considering that many of them would not produce fewer barrels in such a scenario. The verbal intervention appears to establish a target level for Brent at around the $100 mark, but we wonder whether it is also aimed at hardening opposition to a nuclear deal with regional rival Iran.

China’s State Council approved a raft of measures aimed at supporting growth, including roughly $145 billion in new spending. Policymakers pledged to use the “tools available in the toolbox”, but said they would avoid flooding the economy with excessive stimulus in a way that could reduce policy options in the future. Property developer shares climbed on the announcement, but the scale of the effort means broader economic implications are likely fairly limited – after decades of overinvestment, China’s property market value has been estimated at more than $52 trillion dollars, and the systemic risks are enormous.

Jobless claims are expected to increase to 255,000 in the week ended August 20, up from 250,000 in the prior week. The number of Americans submitting requests for unemployment insurance has risen steadily for months, but remains vastly below levels typically seen in a downturn.

Second quarter gross domestic product could be revised up, with estimates suggesting a -0.5 percent annualized decline, better than the -0.9 percent originally reported, but not enough to quash recession calls in some corners of the markets.

Statistics Canada will likely confirm June’s drop in jobs when it releases its latest Survey of Employment, Payrolls and Hours at 8:30 am. The Canadian dollar is trading on a slightly firmer footing, lifted by rising oil prices and a weaker greenback – but there are good reasons to suspect the currency could be in the firing line around tomorrow’s Fed speech.

Karl Schamotta, Chief Market Strategist

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