Forex News and Events:

Forex News and Events:

Before we get into this week, let’s quickly talk about Jackson Hole. Right now it seems that the Market is just a few steps ahead of policymakers as there is growing feeling that central banks and bankers lack the essential tools needed to control this recovery. The decisions from this small group over the past few months all appear to be knee-jerk reactions – never intelligent stewardship or guidance. Any grand gestures that were expected and/or hoped for from Wyoming failed to materialize. Fed Chairman Bernanke noted that the FOMC stood ready to enact further quantitative easing but failed to provide any details or benchmarks.

Big Ben emphasized that "the committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly." What the statement means is that the Fed will be on Day-Watch, watching US data closely for the foreseeable future. We contend that the recent batch of US data isn’t bad enough to warrant further QE, but it is important to keep an eye on it going into September. This week, we have US ISM and payroll data coming out alongside the FOMC minutes. From the ECB, Trichet failed to provide any short-term insight only discussing the macro needs to reign in government debt and trade imbalances. The fact that nothing happened at the summit gave market’s a slight boost going into the trading week.

This morning, the market braced itself in a defensive position, slowly unwinding risk-averse positions. Asian equities markets rallied with the Nikkei up 1.79% and Shanghai up 1.51% (at time of writing). This morning’s rally shouldn’t have staying power because it isn’t based on any change in fundamentals, just relief that nothing radical was attempted from Wyoming.

In Japan, the BoJ stepped into the fray to enlarge the size of fixed-rate operations to ¥30 trillion, up from the previous ¥20 trillion, and further lengthening the maturity of operations to 6 months, from 3. Prior to the announcement, the BoJ had an emergency meeting and it was widely understood that the central bank would finally take some action. PM Kan had announced on Friday that the government would take aggressive action to thwart the appreciation of the Yen and that the tactics would be announced August 31st.

As expected, the Forex Market was lock-in-step with the currency move. The USDJPY rallied as speculation swirled – however after the BoJ announcement, the asset pair quickly gave back much of its gains. The BoJ was a bit too slow in our opinion to shift the market’s perception of the Yen and we suspect that the JPY will quickly resume its previous course. The only way to change the trajectory may be direct action by the Japanese MoF.

In the near term, most institutional participants assume the central banks will resume quantitative easing in some form or another to stave off further economic decline. We suspect the upside in risk-correlated trades will be limited going into the Fall. The UK is away today on bank holiday, so look for some nice range-bound trading with a slight tilt toward risk aversion.