Fed Jawbone Unbroken, NZ Jobs next

We mulled the inability of central bankers to influence markets yesterday and today Dudley and Lockhart showed the Fed's jaw still has some strength, at least on the hawkish side. The pound was the top performer on Tuesday while the US dollar lagged despite a rebound in New York trading. The New Zealand jobs report is due next. A new index trade was issued earlier today. There are 2 NZD trades in progress ahead of the upcoming NZ jobs. The Video for Premium subscribers is posted below.

Click To Enlarge

The Fed's Dudley stole the focus from the US inflation report on Tuesday. CPI ex-food and energy rose 0.1% in July compared to 0.2% expected but dollar weakness on the headlines was swamped by a hint at a hike from Dudley. The NY Fed chief said a hike in September was possible. The Fed fund futures market was pricing in a 22% chance of a hike before the comment so it was always 'possible' but the dollar sensed it was a sign of a higher possibility and it jumped a half-cent across the board after touching session lows moments earlier.

The dollar rebound extended after US industrial production rose 0.7% in July compared to 0.3% expected. The turnaround prevented a USD/JPY close below 100.00 for the first time 2013. Despite the 75 pip climb from the lows, the pair still finished in deeply negative territory and at the lowest level since early July.

The Fed's Lockhart also helped the US dollar with a comment that two Fed hikes this year are still conceivable and that he was reasonably confident inflation will hit 2% by the end of 2017. The main risk he highlighted was poor business investment.

The comments today showed the Fed's jawbone, at least, isn't broken but it may only work in one direction. The market can't help but fear a hike while any easing bias can be brushed aside due to the limitations of the lower bound.

We also question if the dollar bounce can be sustained by talk that doesn't include action. The market may have moved more than would normally be expected on hawkish comments because of less liquid Summer markets. Ultimately, the Fed has failed countless times to back up tough talk on rates with action.

One central bank with plenty of room for traditional stimulus is the RBNZ. They will get a critical reading on the economy in the next 15 mins with the Q2 employment report due at 2245 GMT. Expectations are high with the unemployment rate forecast to fall to 5.3% from 5.7%. Make sure to watch the corresponding participation rate. It's forecast to fall to 68.8% from 69.0% and that would cover nearly half the 'improvement' in joblessness.

The other data point on the agenda is the Q2 Australian wage price index at 0130 GMT. It's forecast to rise 0.5% q/q.