Dollar Soars as FOMC Minutes Signal Potential Change

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Daily FX Market Roundup 08.20.14

Dollar Soars as FOMC Minutes Signal Potential Change

EUR Drops to 11 Month Lows

Why Hawkish BoE Minutes Failed to Drive GBP Higher

NZD Drops to 5-Month Low

AUD: Neutral RBA Minutes

CAD: Wholesale Sales Surprise to Upside

JPY: Trade Data Shows Improvement in Demand

Dollar Soars as FOMC Minutes Signal Potential Change

The U.S. dollar soared to fresh multi-month highs today against many of the major currency pairs following the release of the Fed minutes. The greenback had actually been trading well throughout the North American session but the less dovish FOMC minutes drove EUR/USD to its highest level in 11 months and USD/JPY to a 4 month high. To the market’s surprise, the minutes contained a lot more information than the FOMC statement. According to report, many Fed officials said job gains might bring an earlier rate rise and many believe that the line about significant underutilization of labor market resources may have to change soon. Even though many policymakers also believe that the labor market is far from normal, they acknowledge that it is “noticeable closer” to normal conditions. In other words the Fed is getting closer to changing their guidance and we firmly believe that we could see a far less dovish posture at the September FOMC meeting. We would not be surprised if the Janet Yellen also adopted a less dovish stance at Jackson Hole. She is scheduled to make a speech on the labor market on Friday and we expect the dollar to trade strongly ahead of her speech. No one expected this level of clarity from the FOMC minutes and we think it is enough to sustain the uptrend in the dollar and maybe even put a bottom in U.S. yields.

EUR Drops to 11 Month Lows

The euro continued to trade lower against the U.S. dollar today, dropping below its November low to the weakest level since September 2013. While the currency pair had been trickling lower throughout the European trading session, it was driven to 11-month lows on the back of the less dovish FOMC minutes. As we mentioned earlier this week, the widening divergence between Eurozone and U.S. data and EZ/US monetary policy has put significant pressure on the EUR/USD. The decline in German producer prices in the month of July only builds the case for additional ECB easing while today’s FOMC minutes reminds us that the Fed is thinking about raising rates at a time when the ECB is thinking about lowering them. Taking a look at the charts the next significant support level for EUR/USD is near 1.3250, the 38.2% Fibonacci retracement of the July 2012 to May 2014 rally. Whether this support level is held or broken hinges on tomorrow’s Eurozone PMI reports. Based on the market’s forecasts, manufacturing and service sector activity is expected to slow and given the recent decline in industrial production and factory orders, this seems likely. We certainly favor another weak release that will add pressure on the EUR/USD but given the amount of overstretched short positions in an environment where the EUR/USD is deeply oversold, a surprise increase in Eurozone PMI will trigger a quick and aggressive relief rally in the currency pair.

Why Hawkish BoE Minutes Failed to Drive GBP Higher

At the last monetary policy meeting, 2 members of the Bank of England voted in favor of a rate hike but after all of the confusion created by U.K. policymakers over the past month, investors eyed the hawkish BoE minutes with caution. Had BoE Governor Carney never backtracked on his hawkish bias and then revisited it again this week, sterling would have probably soared on the back of today’s reports but between the dovish Quarterly Inflation Report and softer U.K. data, it is hard for investors to wrap their heads around where the central bank really stands. What we do know is that the level of desire to raise rates early is growing. Although McCafferty and Weale were the only members to vote for a rate hike, BoE Governor Carney probably isn’t far behind because he shares their same view that “wage rises may be lagging the uptake in labor market and that since monetary policy also operates with a lag, the BoE should anticipate the decline in spare labor capacity and tighten policy now. Both Mr. McCafferty’s and Mr. Weale’s arguments fell on deaf ears tday as the latest UK CPI data which was released just yesterday and well before the BoE meeting is suggesting just the opposite – namely that price pressures are decreasing rather than increasing, making the case the for a rate hike at this time utterly unnecessary” according to our colleague Boris Schlossberg. At this stage, with policymakers leaving investors particularly confused, the outlook for sterling and rate hike expectations hinge on the data because the numbers don’t lie. Tomorrow’s retail sales report will be particularly important. Spending is expected to rebound in July but if they decline as indicated by a report from the British Retail Consortium, sterling could find itself trading at fresh 4 month lows versus the U.S. dollar.


NZD Drops to 5-Month Low

Additional selling during the Asian trading session drove the New Zealand dollar to a 5 month low today. It is not unusual and actually quite common to see NZD/USD extend its losses on the day after the dairy auction because traders in Asia respond to the auction results 12 hours forward. However by the end of the North American trading session, NZD/USD recovered nearly 50% of its losses. The currency pair is still in a downtrend but with no additional catalyst this week, the decline could lose momentum especially if tonight’s Chinese PMI report surprises to the upside. HSBC is looking for a slight slowdown in manufacturing activity but recently we have seen more improvements than deterioration in China’s economy. The Australian dollar on the other hand rebounded on the back of relatively neutral comments from RBA Governor Glenn Stevens. He noted the improvements in the labor market and productivity and said they want to allow time for measures to take effect, which indicates that the central bank wants to give the economy a greater opportunity to absorb the easing. While they continue to believe that AUD is overvalued and feel that investors are underestimating the risk of a material decline in the Australian dollar, his admission that intervention is not always successful suggests that they are not eager about selling the currency particularly since they had thought about intervention when A$ was much higher but failed to follow through. The bottom line is that the RBA doesn’t plan to cut interest rates anytime soon, which is positive for AUD/USD and has helped the currency pair shrug off a decline in leading indicators. The Canadian dollar ended the day virtually unchanged against the greenback despite a larger than expected increase in wholesale sales.

JPY: Trade Data Shows Improvement in Demand

Thanks to the rally in USD/JPY and the overall demand for risk currencies, all of the Japanese Yen crosses traded higher today. AUD/JPY was the best performing currency pair, which should not be a big surprise given its strong correlation with U.S. stocks, which are closing in on record highs. Although Japan’s trade balance widened to -964.0 billion yen from -823 billion yen in the month of July, exports rose for the first time in 3 months by 3.9%. The reason why the trade deficit increased despite the improvement in external demand was because imports rose 2.3% year over year. This was also good news because it reflected an improvement in domestic demand. On a seasonally adjusted basis, the trade deficit narrowed but less than anticipated. Nonetheless the improvement in internal and external demand is positive for Japan’s economy. Tonight, the manufacturing PMI index is scheduled for release and a pickup in manufacturing activity combined with the latest trade numbers would offset some of the weakness seen in recent data and reduce the chance of BoJ easing this year.

Kathy Lien
Managing Director

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