FOMC Minutes disappoint the USD bears

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SUMMARY

ANALYSIS

USDCAD

Dollar/CAD traders ultimately defended trend-line support in the 1.3140s yesterday morning and they got some help from a broad wave of USD buying into the London fix as the spot gold market appeared to trip stop orders below $1,980/oz.  The OPEC+ JMMC meeting (which urged compliance with current production curbs) and the weekly EIA report (which showed a smaller than expected draw in crude inventories) didn’t have a meaningful impact on WTI prices and therefore the Canadian dollar.

We posited mid-day yesterday that the dip in gold possibly foreshadowed a weak US 20yr yield auction, and it turns out we got just that at 1pmET (2.26 bid-to-cover vs 2.43 last month with a 0.9bp tail), but US yields and the USD took the news in stride and didn’t extend session gains at the point.  All this changed about an hour later when the FOMC Minutes appeared to throw cold water on the idea of the Fed adopting an even more dovish policy strategy in September…and before we knew it US yields and the USD were extending their gains.  We felt this wire headline was the kicker (MOST POLICYMAKERS JUDGED YIELD CAPS AND TARGETS WOULD LIKELY PROVIDE ONLY MODEST BENEFITS IN CURRENT ENVIRONMENT), which very much read contrary to market expectations going into this release.

Strong NY closes for the USD (especially against GBP, AUD and JPY) allowed the broader dollar to rally further into early Asian trade last night.  Dollar/CAD’s close was a little less convincing (above 1.3190-1.3200, but not above 1.3230).  The Nikkei and the Shanghai Composite largely played catch to the risk-off tone sparked by the FOMC Minutes and each traded down over 1%.  US yields completely gave up their gains by the end of Asian trade however, and we feel this largely explained Europe’s desire to short USD once again this morning, but the price action has been choppy with GBP leading and the AUD lagging (complete opposite from yesterday).

Today’s NY session has kicked off with some disappointing numbers from two fresh US data sets (see below) and this has seen the US 10yr yield briefly touch the 0.63% handle and the FX markets develop a risk-off posture, which is helping the broader USD rally once again.  October WTI prices are looking cranky (now down 3%), but USDCAD is still struggling to definitively break above 1.3230…perhaps because of EURUSD’s bid into the NY options cut and the two-way battle currently underway in GBPUSD?  (see below). 

US JOBLESS CLAIMS ROSE TO 1,106,000 AUG 15 WEEK (CONSENSUS 925,000) FROM 971,000 PRIOR WEEK (PREVIOUS 963,000)

PHILADELPHIA FED BUSINESS CONDITIONS AUGUST 17.2 (CONSENSUS 21.0) VS JULY 24.1

PHILADELPHIA FED NEW ORDERS INDEX AUGUST 19.0 VS JULY 23.0

PHILADELPHIA FED EMPLOYMENT INDEX AUGUST 9.0 VS JULY 20.1
 

USDCAD DAILY

USDCAD HOURLY

SEP CRUDE OIL DAILY

EURUSD

Euro/dollar recorded one of the better (or less worse) NY closes yesterday, relative to its G7 peers.  While the gold-driven fall below the 1.1910s was a negative technical development yesterday morning, we feel that the market’s ability to hold the 1.1830s trend-line support level was a mild positive by the end of the day.  Hedging around this morning’s 1.4blnEUR option expiry at 1.1850 seems to have helped EURUSD recover its losses after the weaker than expected US jobless claims/Philly Fed data.  We think the 1.1830s will be the pivotal level for today’s trade.  

EURUSD DAILY

EURUSD HOURLY

SPOT GOLD DAILY

GBPUSD

Sterling has been volatile mess this morning as a battle appears to be underway for control of the market at the pivotal 1.3320-30s.  The market surged above this level on Tuesday, crashed below it yesterday after the FOMC Minutes, patronized new GBPUSD shorts with a head-fake move above it in early NY trade today, only to fall precipitously back down below it after this morning’s negative US data set...and now it's rallying yet again!  Watch out for tomorrow’s rather large EURGBP option expiry at the 0.9050 strike as it could bring about more GBP selling if euro/sterling goes bid into it.

GBPUSD DAILY

GBPUSD HOURLY

EURGBP DAILY

AUDUSD

The Australian dollar recorded a rather ominous bearish reversal after the FOMC Minutes yesterday.  The pivotal 0.7230s level gave way in the process and we think made it easy for the market to fall further after this morning’s weaker than expected US jobless claims/Philly Fed data.  Hedging around this morning’s 1.3blnAUD worth of option expiries between 0.7125 and 0.7150 seems like it played a part in AUDUSD’s decline, but this event has now passed and the Aussie has steadied a touch at trend-line support in the 0.7130s.

AUDUSD DAILY

AUDUSD HOURLY

USDCNH DAILY

USDJPY

Dollar/yen scored a bullish outside reversal yesterday after the minutes of the Fed’s latest meeting revealed that average inflation targeting and yield-curve-control might not be coming at all at September's FOMC meeting and, while this led to some follow-though buying above 105.80-106.00 resistance in early Asian trade last night, these gains began to unravel when US yields traded back down below 0.66%.

The bond markets almost always get it right in our opinion and what we think it’s saying here is “so what about the lack of yield curve caps and monetary policy that seeks to adjust inflation expectations higher…there’s no meaningful inflation risk anywhere right now and the Fed looks powerless to manufacture it + the economic outlook looks increasingly uncertain and this morning’s weak US data proves the point”.  

The question for FX markets and the broader USD right now is: what does this mean for global equity market risk sentiment?  Rates will stay low (we know that), but can equity traders cling to hopes that the Fed will ultimately fold and give into these new measures later this year when things don’t get better (USD negative), or will the stock market have a tantrum because it’s not getting fed even more dovish signals right now (USD bullish)?  We think it might take a sharp sell-off in the stock market to force the Fed’s hand at this point.

USDJPY DAILY

USDJPY HOURLY

US 10YR BOND YIELD DAILY

Charts: Reuters Eikon

About the Author

Erik Bregar - Director, Head of FX Strategy

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

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