Is FX Market Anticipating a Fed Hike Delay?

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Market Drivers Aug 19, 2015

Bundestag votes on Greek bailout
Comm dollars rebound
Nikkei -1.61% Europe -0.19%
Oil $42/bbl
Gold $1122/oz.

Europe and Asia:
NZD PPI -0.3% vs. -0.5%
AUD LEI 0.0% vs. 0.0%
EUR Current Account 25.4B vs. 19.2B

North America:
USD CPI 08:30

USD FOMC Minutes 14:00

It’s been yet another quiet night of listless trade on the currency market with most pairs trading in extraordinarily tight ranges as market participants await the FOMC minutes later in the day.

With virtually no data on the docket and most of Europe on holiday, the markets have been essentially treading water since the NY close yesterday. The only movement of note has been in the commodity dollars which saw a mild bid throughout the night on the back of stabilization in oil and gold.

Both Aussie and loonie were slightly higher, but the kiwi also got a boost from a better than expected dairy auction yesterday and news that Russia lifted its ban on dairy imports.

The euro popped to 1.1070 on news that German and Dutch Parliaments would approve the Greek bailout deal – but that news a foregone conclusion and the pair retraced some of its gains as it continues to stay above the key 1.1000 level.

The marquee event of the week will be the FOMC minutes from last months meeting. This will be one of the most important clues for market that is trying to ascertain whether the Fed hikes rates in September or not. The minutes could provide an update on Fed assessment of labor market conditions and inflation outlook.

Still the minutes are three week olds and in that time frame the markets have seen the devaluation of the yuan and further decline in energy prices – two factors that may make it highly problematic for the Fed to proceed with normalization just yet.

If the tone of the minutes suggests a sense of hesitation on the part of most FOMC members the dollar could get hit in late NY afternoon with USD/JPY likely testing the 1.2400 level while EUR/USD will try to pop the 1.1100 barrier. Any delay in Fed’s policy action could open the way for a more sustained short covering rally that could surprise dollar bulls with its ferocity during liquidity starved summer doldrum trade.

Boris Schlossberg
Managing Director

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