The US employment report at the end of this week will have even greater significance than normal as it will be the last labour market data that both the Federal Reserve and investors study together before a possible rate decision later on this month (I’m sure the U.S central bank has access to more data that the rest of us mortals are not privy to). We already have it on record from key Federal Reserve decision makers that there’s a ‘50-50’ chance of a rate hike in September. For the record, economists expect 220,000 additions to the labour force, which compares to 215,000 additions in July, with the unemployment rate to marginally decline from 5.3% to 5.2%. Barring some negative surprise it’s hard to see the US central bank not gaining confidence from the continued robust expansion of the labour market, and rightly so.

I suspect that we are probably at a stage in the macro cycle where a negative surprise will cause a far bigger reaction from the market than a positive one. This is because of the elevated levels of volatility we are currently experiencing; poor data coming out of China, Japan and Korea; and also the poor ISM Manufacturing PMI data published yesterday afternoon in the United States. One suspects that market watchers have taken a few hits to their confidence in global growth recently, so a significant labour market disappointment in the United States is not what the doctor ordered.

In my last blog I was rather blasé about the Korean export data disappointment, which was misleading. South Korea along with Singapore are often regarded as bellwether economies. They both correlate highly with global growth and sit right at the heart of the global supply chain. These economies should be prospering if the global economy is hale and hearty, but the fact that the Korean export data (-15% versus -10% expected) was so bad could be a symptom of wider significance. When I wrote yesterday’s blog my belief was that there are Chinese and Japanese causes for such a steep export contraction, but that is not backed up by facts yet. And so, for now, the jury is out and we need to take especial note of big data events like the non-farm payrolls report in the U.S which is published on Friday.

For today, asset markets continue to gyrate as the ripple effects of the recent market volatility continue to play out. Today crude oil continues to give up some of the recent bounce moving back to sub $50 for Brent. Personally I will stick with my view that last month’s low could be a base for a considerable time to come, if it is violated that will take on great significance in my view – I should point out that may oil traders are looking for $25 oil in the next couple of years, I don’t have anything against that view, I just think the recent low is like to be in place for some time.. The dollar dominates today, and equity markets are rallying which is no surprise given the paradigm I often talk about. While I continue to believe that EUR/GBP can head higher from these levels, that might not be the case today.

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Technical analysts place great store in specific time dates and periods, largely because traders are heavily influenced by these dates as well. If your investors are only able to view your performance on a monthly basis then like it or not the end of the month will carry a certain significance for you. After the fun and games of the last few weeks it’s a good idea to take a step back and look at monthly charts, particularly bar charts and candlesticks to assess the technical damage, if any. In my view the watch-list which we maintain reveals the following…

It’s not ideal, and certainly not as clear as one could hope for, and of course these observations are just based on the monthly candle sticks, but it does look like the most heavily punished emerging market and commodity assets could be due for recoveries into the end of the year, and it’s possible we see some pound sterling underperformance, certainly against the euro, possibly even against the basket. I would place a higher level of conviction in the cleaner charts for oil and EUR/GBP.

As bullish as the monthly chart for oil looks, that hasn’t stopped oil from selling off this morning on the back of yet more poor data out of China. In this case the data is the manufacturing PMI (purchasing manager’s index) for August, which as expected came in showing a slight contraction. Quite why the markets should react in such a way when the data only came in as expected is something I’ll have to ruminate on at a later time, but it is what it is. Perhaps it’s the addition of this poor data with the disappointing industrial production data in Japan yesterday which pretty much tells you to look away from East Asia if you’re seeking encouragement for global growth prospects. It can’t be much of a surprise that South Korean exports have also plummeted.

The news has been a sight more cheerful in Europe though. German and Italian retail sales massively beat expectations, although manufacturing PMI’s which are being published as we speak are largely indifferent. Better news in Germany is being somewhat stifled by not so good data from France and Italy. It’s all much of a muchness though.

Of much more interest to me have been comments over the weekend coming out of the Jackson Hole central banker conference. While it didn’t promise to be the star studded event that last year’s one was, it might just have made up for it with comments from key US policy makers. It was acknowledged that there is a significant lag between rate moves and the impact on the real economy, and so while inflation is currently no problem at all, it would be better to start moving towards higher rates now rather than being forced to react later. I fully subscribe to this view, as I’m sure you’re aware. Interestingly another Fed policy maker suggested that while events in China are being closely monitored to assess the impact on the United States and the wider global community, there remains a 50% chance that the first rate hike occurs this month. All in all some nice snippets from Jackson Hole. I was also encouraged by the fact that some speakers have acknowledged that central banks may not have as much influence as they seem to think in terms of steering inflation. Always nice to get a dose of reality.

So what does this all mean for FX markets in the next week? Tough to say, but I can see emerging market currencies recovering some more, if you’re not aware of it, oil has recovered some 25% from its lows early last week, on that basis resource rich currencies are lagging. I am also more disposed to view the recent equity market lows as a base from which the market can climb, I think we just had a classic buying opportunity on the recent market dip, and the scene is set for a rally from here. I see nothing altering the paradigm of dollar strength in conjunction with positive risk sentiment, so my bias is for the dollar to strengthen as well. There is a not insignificant chance that a first Fed rate hike in almost a decade could happen this month, this should be a dominating influence on the greenback in the early part of the month. For that reason I suspect there is limited downside in the dollar over the next few weeks. I’m not so sure I can say the same for the pound sterling though…

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Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.

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