Dollar Gets its Groove

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Market Drivers May 18, 2016

Japanese GDP beats
UK labor data bit better
Nikkei -0.05% Dax -0.39%
Oil $48/bbl
Gold $1272/oz.

Europe and Asia:
JPY GDP 0.4% vs. 0.1%
GBP UK Claimant Count -2.4K vs. 2.1K
EUR CPI 0.0% vs. 0.0%

North America:
USD FOMC Minutes 14:30

The dollar was stronger across the board in Asian and early European trade today as markets saw a delayed reaction to a series of hawkish statements from FOMC members yesterday emphasizing the idea that the June meeting would very much be “live”.

Yesterday during North American trade several FOMC members including Kaplan, Williams and Lockhart stated that the June meeting would be “live” indicating that the Fed would consider the possibility of raising rates to further normalise monetary policy. The Fed funds markets remain sceptical about any rates hikes before the end of the year, but FX markets reacted positively to the rhetoric pushing EUR/USD towards 1.1250 GBP/USD to 1.4400 and USD/JPY to 109.50 in Asian and morning European dealing.

Today’s FOMC minutes due at 18:30 GMT may shed more light on the prospect of any Fed tightening this June and if the tone of the discussion is hawkish the market may reassess its view and bid the greenback higher as expectations will clearly change.

In other news Japanese GDP printed much better than forecast at 0.4% versus 0.1% eyed providing a temporary boost to yen as USD/JPY dropped to a low of 108.72 in Tokyo morning trade. The flows however, were quickly reversed as the headline reading was weaker than first appeared. Exports were the big driver of growth in Q1, but in Q2 those numbers would be far more difficult to replicate given the sharp rise in yen. Furthermore business capex was weak coming in at -1.4% versus -0.8% eyed which leaves scope for further BOJ easing as investments continue to lag. The pair quickly found bids at 108.70 level and rose to a high of 109.50 on both prospect of further BOJ action and overall dollar strength.

In UK the claimant count numbers came in at -2.4K versus 2.1K forecast but cable fell hard on the news after traders got a look at the wage data which only rose 2.1% versus 2.3% anticipated on an ex-bonus basis. The slowdown in UK economy has been evident for weeks but that pair has essentially been a trade on the latest Brexit poll results. It appears that the market is now starting to pay more attention to the deteriorating fundamentals and if FOMC members are serious about the possibility of a Fed hike cable could quickly tumble to 1.4000 over the next few weeks as market focus shifts back to economics and away from politics.

Boris Schlossberg
Managing Director

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