Dollar Damaged Post FOMC

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Market Drivers for October 9 2014

AU Data misses headline but full time grows by 20K

German Trade Balance 17.5B vs 18.4B

Nikkei -0.75% Europe 0.94%

Oil $87/bbl

Gold $1228/oz.

Europe and Asia:

AU Employment -29.7K vs. 17.6K

GE Trade Balance 17.5B vs. 18.4B

North America:

GBP UK MPC Meeting 07:00

CAD NHPI 08:30

USD Weekly Jobless 08:30

The currency market continued to sell dollars in Asian and early European trade today as traders reacted to the surprisingly dovish minutes from the FOMC which suggested US rates may remain at zero bound for far longer than expected.

The FOMC expressed both concern over the strong dollar and the weak global demand environment indicating that such conditions are unlikely to generate any inflationary pressures and therefore will create less need for the Fed to tighten in the foreseeable future. The majors took a little time to react to the news, rising slowly through the North American close yesterday, but the anti- dollar momentum has continued in Asian and European trade today with EUR/USD eyeing the 1.2800 level while USD/JPY approached 107.50.

The short covering rally against the buck has been swift and vicious precisely because the dollar has been so overbought over the past several months as the one way trade became almost a universal view. This weeks correction which may have more room to run could squeeze out a few more late shorts before the dollar regains its bid.

The FOMC minutes, however, were a bombshell for the market because they have clearly changed the timeline for Fed tightening and will now force traders to pay more attention to inflation data rather than growth figures to ascertain the next policy move.

In other news, the big event risk in overnight trade was the Australian employment report which was shrouded in confusion ahead of its release when the Australian Bureau of Statistics suddenly announced that it was moving away from the its seasonally adjusted model. The headline number missed the forecast coming in a -29.7K vs, 15K eyed but the underlying data was considerably better as all the lost jobs were part time while full time employment grew a respectable 21K.

The ABS noted that the seasonally adjusted data has exhibited unusual volatility which could be the result of “one or more factors including changes in ‘real world’ labour market behaviour, changes in the timing and content of the supplementary survey program (run in conjunction with the Labour Force Survey), the introduction of web-forms, the introduction of the new labour force questionnaire, or refinements to collection procedures.’ In either case the underlying trend shows that the labor market Down Under has stabilized although some analysts have noted that the total labor hours worked figure has declined pointing to continued weakness.

The Aussie nevertheless found a bid as the night progressed on the assumption that RBA will remain neutral in its policy while the Fed will remain at zero bound preserving the positive spread in rates for the pair. It rose to a high of 8898 before finding sellers ahead of the figure.

In North America today, the calendar is once again light with only the weekly jobless claims on the docket. The price action will likely be driven by technical factors with dollar shorts trying to extend the move. With US rate remaining near monthly lows, USD/JPY looks particularly vulnerable and 107.50 could be the key target as the day progresses.

Boris Schlossberg
Managing Director

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