Who will steal Jackson Hole spotlight?

It's that time of the year again! Every year since 1978, central bankers from the world over come to Jackson Hole, Wyoming to talk about the current economic issues.

This weekend, on September 1 and September 2, hotshots in the financial world will once again gather for the symposium. Among a long list of topics to be discussed, investors will definitely be on their toes for the plans of two major central banks: the ECB and the Fed.

Bond buying from the ECB?

In recent weeks, there have been speculations that the ECB would intervene in bond markets by buying bonds of peripheral EZ countries to keep their borrowing costs from rising.

Market junkies were hoping to get more clues on the issue at this week's summit.
However, the ECB announced yesterday that head honcho Mario Draghi will not attend the meeting due to a heavy workload in the coming days. In fact, no one from the ECB executive board will make it to the conference!

Of course, the announcement only fueled speculations even further, as investors believe that the central bank is busy ironing out the details of another bond-buying program.

However, don't get too excited just yet. Some analysts warn that Draghi will not let us in on his plans before the German Constitutional Court passes its rule on the legality of the ESM on September 12. That said, I doubt we'll hear any details about bond buying and a yield cap this weekend.

Bernanke Comments on QE3

Back in 2010, our old buddy Big Ben Bernanke basically dropped a bomb at Jackson Hole - a liquidity bomb, that is!

With the U.S. economy down in the dumps, Bernanke announced that the Fed would be introducing another round of quantitative easing measures which infamously became known as QE2. Two years later, could history repeat itself?

Not so fast, my young padawan economists. As it turns out, many doubt that Bernanke will go so far as to use the symposium as a signaling event for the Fed's future monetary policy plans. With the August NFP figures not due until next week, it is unlikely that Bernanke will take a strong position on QE3.

Instead, we can probably expect the Fed Chairman to merely follow the same wait-and-see tone that the Fed has steadfastly stuck to the past few months.

How will the financial markets react?

Many traders may be getting caught up in the euphoria ahead of the meeting and may already be pricing in additional easing measures from both the ECB and Fed.

However, I've got a feeling that many market participants will be disappointed by the results of the symposium. If and when this happens, we could see the dollar rally as optimism for more liquidity dies down.

On the other hand, if there's even the slightest hint that the ECB will push through with putting a yield cap on bond yields, or if Bernanke signals that the Fed is ready to dump billions into the economy, we could see a strong risk rally take place.

In any case, make sure you tune in every now and then and see what's developing at the Jackson Hole Symposium! You never know when a game-changer may rock the markets!

Euro at Risk as French and German Finance Ministers Meet, Aussie Sold

Euro at Risk Amid Continued Dithering as French, German FinMins Meet

German IFO Drop Unlikely to Produce Lasting Reaction from FX Markets

Dallas Fed Manufacturing Survey May Dent QE3 Hopes, Boost US Dollar

The US Dollar consolidated against most of its top counterparts as an absence of big-ticket catalysts left currency markets in consolidation mode. The Australian Dollar narrowly underperformed as year-to-date Chinese Industrial Profits fell at an annual pace of 2.7 percent, marking the sharpest contraction in five months. The outcome stoked fears about fading Chinese demand for Australian exports, the key driver behind the mining boom that has kept the country’s economy relatively well-supported through the 2008 crisis and its aftermath.

Looking ahead, a meeting between the German and French Finance Ministers (Wolfgang Schauble and Pierre Moscovici, respectively) is in focus. The two are expected to discuss goals for Greece’s debt-reduction efforts, but concrete progress seems unlikely. Indeed, Eurogroup leader Jean-Claude Junker and German Chancellor Angela Merkel both signaled that any decision on extending the deadline for Athens to complete its austerity efforts will have to wait until inspectors from the EU/ECB/IMF “troika” complete their assessment of Greece’s progress.

With that in mind, the lack of action itself may prove to weigh on the Euro. Anticlimactic developments late last week revealed investors’ frustration with a lack of directional cues – whether positive or negative – from Eurozone officials. Markets may be approaching a juncture where price action forces policy once again, with selling pressure emerging amid signs of continued dithering.

On the data front, the German IFO gauge of business confidence is in focus. Expectations call for the headline Business Climate reading to drop to 102.7, the lowest since March 2010. The outcome seems unlikely to produce a lasting impact on the Euro in and of itself considering its limited implications for ECB monetary policy, where traders remain preoccupied with the details of the central bank’s opaque bond-buying scheme.

Later in the session, the spotlight shifts to the Dallas Fed Manufacturing Surveyas traders set the backdrop for Friday’s much-anticipated speech from Ben Bernanke at the Jackson Hole central bank symposium, which many hope will bring an announcement of QE3. Expectations call for a narrow improvement in August after the metric hit a 10-month low in July. Such a result may turn the markets’ attention to the recent improvement in US economic data, denting stimulus bets and boosting the greenback.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:01	GBP	Hometrack Housing Survey (MoM) (AUG)	-0.1%	-	-0.1%
23:01	GBP	Hometrack Housing Survey (YoY) (AUG)	-0.5%	-	-0.5%
1:30	CNY	Industrial Profits YTD (YoY) (JUL)	-2.7%	-	-2.2%

Euro Session: What to Expect

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
-	EUR	French, German Finance Ministers Meet	-	-	Medium
6:00	EUR	German Import Price Index (YoY) (JUL)	1.2% (A)	1.3%	Low
6:00	EUR	German Import Price Index (MoM) (JUL)	0.7% (A)	-1.5%	Low
8:00	EUR	German IFO – Business Climate (AUG)	102.7	103.3	Medium
8:00	EUR	German IFO – Current Assessment (AUG)	110.8	111.6	Medium
8:00	EUR	German IFO – Expectations (AUG)	95.0	95.6	Medium
9:30	EUR	Germany to Sell €3B in 12mo Bills	-	-	Low
13:00	EUR	France to Sell €7B in 3-, 6- and 12-mo Bills	-	-	Low

Storms over Greece, ECB policy

Angela Merkel tried to calm a growing storm over euro zone crisis strategy on Sunday after the Bundesbank likened ECB bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year.
The comments, from central bank chief Jens Weidmann and a senior figure in the Bavarian Christian Social Union (CSU), Alexander Dobrindt, point to mounting unease in Germany with the policies being used to combat the three-year old debt crisis.

Domestic criticism has narrowed Merkel's room for maneuver at a time when Greece is in dire need of more aid and policymakers are scrambling to prevent contagion from enveloping big countries like Spain and Italy.

Two days after Greek Prime Minister Antonis Samaras visited Berlin and made an impassioned plea for politicians there not to talk up the possibility of a Greek euro exit, Merkel herself sent a warning to allies who have said the euro zone would be better off without its weakest link.

"We are in a very decisive phase in combating the euro debt crisis," Merkel told public broadcaster ARD in an interview. "My plea is that everyone weigh their words very carefully."

Dobrindt, whose party is preparing for a regional election in Bavaria and the federal vote next autumn, told top-selling German daily Bild he expected Greece to leave the euro zone in 2013. His comments drew a swift rebuke from Foreign Minister Guido Westerwelle who said "bullying" of euro members must stop.

In addition to Greece, policymakers have been sparring over European Central Bank President Mario Draghi's plans to buy up the bonds of Spain and Italy.

The ECB is assuming a greater role in the crisis while governments negotiate legal and political hurdles to coordinating a longer-term response. The bank's Italian head is expected to detail his plans after a September 6 meeting of its 23-member governing council.

Merkel gave her tacit support to Draghi on a trip to Canada earlier this month and reiterated in the ARD interview that she believed the ECB's policies were in line with its mandate to ensure stable prices in the bloc.

ADDICTIVE

But Weidmann, a former economic adviser to Merkel, said in a front-page interview in influential German magazine Der Spiegel that the bond buys could violate rules against the ECB providing outright financing to governments.

"Such a policy is for me close to state financing via the printing press," Weidmann told Spiegel. "In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks."

Financing governments has long been a taboo for Germany. Weidmann's predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB's existing, but now dormant, bond-buying scheme - the Securities Markets Programme (SMP).

"We should not underestimate the risk that central bank financing can become addictive like a drug," Weidmann said.

The Bundesbank retains substantial influence within Germany and on financial markets due to its inflation-fighting credentials but, as just one of 17 constituents at the ECB, it is unlikely it could scupper Draghi's plan.

Asked in the television interview whether she supported Weidmann, Merkel praised him for speaking out about his doubts and said she saw strong Bundesbank influence within the ECB as positive. But she took care not to voice any support for his criticism of Draghi's policies.

Central bank sources told Reuters on Friday that the ECB is considering setting yield band targets under the new bond-buying programme to allow it to keep its strategy shielded and avoid speculators trying to cash in.

Weidmann said setting such yield band targets was a "sensitive notion" but rejected suggestions that he was isolated on the ECB Governing Council in having such reservations.

"I hardly believe that I am the only one to get a stomach ache over this," he said.

Dobrindt was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe".

STICKING TO COMMITMENTS

With the 'troika' of the EU, ECB and International Monetary Fund preparing to return to Greece to assess the plight of the euro zone's weakest link, Austria's chancellor said Athens should get more time to repay its debts, provided it sticks to reforms.

"I see quite a good chance that we will arrive at an outcome with Greece that the Greeks stick to their agreements with the EU but in return get more time for the repayment," Werner Faymann told newspaper Oesterreich.

"The most important thing is that the Greeks stick to the reforms and savings targets agreed with us. If that is guaranteed, I am in favor of a delay in the repayment," he said, adding that the delay could be two or three years.

But Germany's finance and economy ministers both reaffirmed their opposition to any easing of the timeframe for Greece, stressing that giving it more time would mean giving it more money. Samaras has said he needs more time but not more cash.

Samaras elicited no promises from Merkel or from French President Francois Hollande, whom the Greek leader met in Paris on Saturday. No final decisions on Greece are expected before the troika delivers its report in October.

Merkel said she had come away from her talks with Samaras convinced that he was serious about the Greek reform drive, but made clear that the pressure on Athens was extremely high. "Every day counts," she said.

FX Week Ahead: EUR Unlikely To Break Summer Range

Developed currency markets will remain nervous this week ahead of the Friday 31 August Fed policy symposium in Jackson Hole, Wyoming. While the Fed has indicated it is prepared to further ease policy if a “substantial and sustainable strengthening in the pace of the economic recovery” fails to emerge, we think the odds are only 50/50 in terms of a QE3 announcement. Given elevated market expectations of a Fed move, last week’s EUR/USD grind higher now looks vulnerable to a correction lower this week. Adding to EUR vulnerability, uncertainty surrounding Thursday’s Italian bond auction could unsettle EUR bulls – particularly if the new 10Y bond fails to meet expectations. We therefore look for EUR/USD to continue to respect its summer trading range, sliding back towards 1.2450 this week.
XAU rise warns of growing investor concern. The latest move higher in XAU is also likely to garner greater investor attention this week. While central bank gold purchases (projected to exceed 500 tonnes this year) appeared to slip from investor radar screens in recent months, revived expectations for further Fed QE and the potential for the ECB to follow (not forgetting the additional monetary stimulus recently delivered by the BoJ and BoE) have refocused investor attention. Indeed, the SNB’s printing of more than USD60bn of new CHF in June to defend its EUR/CHF 1.20 currency floor warns central bank diversification demand is likely to grow stronger during H212. Indeed, as more private investors ask why central banks are seeking to diversify their fiat currency holdings and follow suit, renewed demand could see the XAU push through USD1,700 as early as this week. Perhaps more importantly, this deterioration in investor sentiment could see XAU move higher this week independently of the Fed policy outcome.
AUD pressure to contrast against CAD support. This week will see growing interest in macro themes as investors seek to avoid second-guessing policymakers. Such investor interest should translate into greater trading activity in peripheral currency crosses – particularly those more exposed to divergent growth themes. Given last week’s continued stream of softer Chinese data, divergent growth expectations relative to the US argue we maintain our short AUD/CAD recommendation. Indeed, notwithstanding economist expectations for a Chinese growth improvement in Q4, recent price declines in steel and iron ore warn markets are moving to price in a potentially sharper Chinese slowdown. We see a growing risk AUD/CAD breaks below its 1.0280 May low this week