The consolidative forces spurred by a lack of economic news flow have continued from yesterday, while the commodity rout has eased as a result of weakness in the greenback. Although the dollar-linked DXY index is trading heavy this morning, the general tone towards the big dollar as of late has been constructive for the bulls, with the firmness coming from increased confidence the Fed’s rate tightening cycle is approaching. Implied yields telegraph that market participants have yet to fully price in a September rate hike, yet there have been a couple of recent developments that support the argument for a liftoff in the next few months. Specifically, St. Louis Fed President Bullard said yesterday that there were better than even odds monetary policy normalization would begin in September, while the San Francisco Fed released a paper that advocated a long period of undershooting inflation doesn’t necessary suggest a statistical departure from the target, and that modest economic growth and falling unemployment will help inflation move back towards the policy target. Arguably, the stubborn nature of inflationary pressures have been one of the main reasons the Fed has delayed the kick-off of their rate tightening cycle, so the release of this paper from the San Francisco Fed seems to be tactical considering next week’s FOMC meeting. While the Fed is not expected to alter its monetary policy trajectory at next week’s meeting, a hawkish slant that the economy is evolving in line with the Fed’s expectations would increase the likelihood the FOMC deems it necessary to lift rates off their lower bound by September. Though there is scope for consolidative positioning from short-term momentum traders to take profit on the dollar, we still favour buying on dips as the market gradually begins to price in the first rate hike.
Over in Asia, monetary policy meeting minutes were released for the last roundtable discussions from both the Bank of Japan and the Reserve Bank of Australia. Both circulars didn’t offer much in the way of deviation from previous viewpoints, and currency markets have reflected the lack of surprise with both the yen and aussie heading into the North American open roughly unchanged against the greenback. The Bank of Japan noted that inflation was continuing to trend in the right direction, suggesting there is little urgency to entertain expanding the size and scope of their asset purchase program. Given the recent downgrade to the Bank of Japan’s inflation forecast expectations are that the BoJ will consider further steps of monetary policy accommodation later in the year, yet there appears no rush to implement any additional increases imminently.
The RBA minutes were a touch dovish given the board did not rule out additional rate cuts, while at the same time telegraphing further depreciation in the domestic currency is needed to rebalance the economy. Though there was nothing earthshattering about the RBA’s commentary from the last policy meeting, all eyes will be on the incoming economic data points (starting with tonight’s CPI figures) and how they will affect the bank’s outlook for monetary policy.
As we get set for the North American open, the lack of tier-one economic data continues to hang over financial markets. S&P futures are pivoting around the unchanged market ahead of the opening bell, while softness in the greenback has lifted gold off its overnight lows back above $1,100, while WTI has managed to pull itself back above $50. The loonie continues to struggle to hold its head above water, seemingly unable to find any buying interest to pull the beleaguered currency off its lows. Selling the waterfowl on rallies will likely reflect market sentiment ahead of Thursday’s retail sales data, with disappointing figures likely to persuade the bears to pressure the currency to its 2009 low relative to the greenback.
Further reading:
Share
