Should Federal Reserve chair Janet Yellen deliver a surprise in her keenly-awaited Jackson Hole speech tomorrow Friday, one of the first places investors will react will likely be the currency market.
Ahead of the speech, Goldman’s FX strategist Robin Brooks has prepared an analysis looking at which 3 currencies one should trade to get the highest bang for the volatility buck on Friday, or as he puts it: “Which Dollar Cross Responds most to Fed Surprises? ”
Over the past three months, the UK pound, Japanese yen and New Zealand dollar have been the most sensitive to policy surprises, according to Goldman’s analysis.
Meanwhile, the Swiss franc, euro and Swedish krona have shown largely shrugged off Fed moves. The US investment bank notes that the euro’s sensitivity (see black line in above chart, Exhibit 4) has actually fallen dramatically recently.
It reckons that has come as “the market has become less interested in the ‘divergence theme’ after a series of disappointments from the [European Central Bank]“, referring to expectations that Fed would tighten policy substantially as the ECB loosens.
That’s backed up by separate analysis from Swiss bank UBS who note investors are shifting their focus from central bank rates to economic growth.
The single currency’s recent appreciation against the dollar has been supported by robust GDP growth in the bloc, with ouput growth surpassing that in the world’s largest economy over the last two quarters. And Fed surprise or not, that’s all good news for the euro.