Good morning. Most major currency pairs are little changed this morning as traders trim positions and avoid directional bets ahead of tomorrow’s long-awaited address from Federal Reserve chair Kevin Warsh at the Jackson Hole economic symposium. Oil prices are edging lower as talks between Iran and Oman over the fate of the Strait of Hormuz show signs of progress, Treasury yields are holding steady, and US equity futures are set for an advance at the open after Nvidia said it expects to grow revenues by 70% over the next year, beating Wall Street expectations.
Data published yesterday morning left Federal Reserve expectations in neutral. The core personal consumption expenditures index—the central bank’s preferred inflation measure*—climbed 3.3% in the year to July, unchanged from the month before and still well above target. After-tax incomes grew faster than prices, but real consumer spending was flat—suggesting that households rebalanced their budgets to cope with high energy prices, and consistent with other indicators that have shown demand cooling slightly in recent months.
Tomorrow’s Jackson Hole address could prove pivotal in shaping how markets interpret the next round of data in early September. Expectations are low, given Kevin Warsh’s aversion to anything that might be taken as forward guidance; few expect him to follow his predecessors in laying out a road map for the Fed’s next moves. He could, however, take steps to dispel the confusion sown during his first two press conferences, when he cast doubt on the central bank’s inflation target and the tools it uses to set policy, and appeared to suggest that markets might do its work for it**. A clearer sense of how he is reading the economy, how he is weighing the trade-offs, and how the forces realigning its foundations—the Trump administration’s protectionist turn, rising geopolitical tension, and the artificial intelligence revolution—are altering the fundamentals could correct earlier market misapprehensions, lifting rate expectations across the front end of the curve and lending more weight to the dollar’s rebound. Or it could be a complete snoozefest***.
Across the Channel, the euro is showing the classic symptoms of fading momentum. After turning higher on signs of economic stability earlier in the year, then climbing sharply in the wake of Scott Bessent’s Treasury market intervention last week, the common currency seems to have stalled out around its 200-day moving average at 1.1635.
The bull case is becoming less compelling. The European Central Bank is expected to raise rates at next month’s meeting, but early indications suggest it will avoid telegraphing another move thereafter. And an energy squeeze looms. Utilities and traders normally buy natural gas over the summer, when it is cheaper, and store it for winter; but the war with Iran has knocked out roughly a fifth of the world’s liquefied-natural-gas supply, and European storage is now only 63.4% full—below the level reached just after Russia’s invasion of Ukraine, and well short of the seasonal norm of about 82%. With Middle Eastern flows still blocked, the Kremlin reportedly planning an escalation and the colder months closing in, Europe faces rising energy bills, worsening terms of trade, and the sort of imported-inflation hit that tends to weigh on the exchange rate.
The Canadian dollar remains remarkably steady, down only slightly from the levels that prevailed before Friday’s breakdown in trade talks. Over the next month, we think it is exposed to a dovish repricing of the Bank of Canada’s path, as policymakers and investors brace for a drawn-out trade conflict with the US and hedge against a softening in the wider economy. Should the rhetoric turn even more bellicose****, a September slide into the low 1.39s, or even through the 1.40 threshold, cannot be ruled out.
The longer-term outlook looks more constructive, however. We still expect the two sides to return to the bargaining table eventually—there are attractive trade compromises to be had that could help rebuild “Fortress North America”. The Canadian government’s support measures should help put a floor under overall economic activity. And more fundamentally, the Trump administration’s repeated attacks have shaken Canada out of its long competitiveness slumber, forcing a dramatic rebalancing away from the debt-fuelled, property-driven growth of recent decades, triggering a push to open global markets, reduce the red tape that has lowered productivity and business investment, and invest in infrastructure—steps that should ultimately translate into stronger foreign inflows and front-running effects in currency markets.
*At the Derek Zoolander Centre for Market Strategists Who Can’t Read Good and Wanna Learn to Do Other Stuff Good Too, it was drilled into us that every mention of the core personal consumption expenditures index must be followed by “the Fed’s preferred inflation measure”.
**A stance that is, of course, at odds with Secretary Bessent’s recent actions in Treasury markets.
***You subscribe for these tradeable views, I know.
****The White House yesterday posted this photograph of a bald eagle pinning a Canada goose to the ice—which comes, it turns out, from an encounter in which the goose ultimately fought the eagle off. As metaphors go for the execution and implementation of US trade policy, one could do worse.