Analysts at TD Securities explained that FOMC minutes suggest that FX markets may have some difficulty in teasing out a direction from here.
Key Quotes:
“The notion that hiking above the long-run level for some time suggests the USD could moderately benefit.”
“It is not enough, however, to break the ranges that have come to define the FX markets, especially given the concern noted about USD strength spillover/growth divergence with the rest of the world.”
“This point should ultimately prove a limiting factor for the USD in the meantime and one that gains credence in the weeks and months ahead.”
“This clearly puts EUR and JPY in focus, with the latter testing the pivotal 112.50/80 area, but a move above is likely to require a material back up in 10yr Treasury yields.”
“At the moment, there may not be an appetite to push this given the shaky backdrop for risk and the September minutes looking a bit stale in light of the volatility observed this month.”
Looking ahead
“We think FX markets will look to the midterms for a stronger directional cue.”
“A divided Congress could see the market question how long US assets can continue to outperform the rest of the world.”
“Indeed, we note that the linkage between the USD’s gains and relative equity performance alongside the shift in USD-denominated capital flows.”
“Now, with the USD a high yielder (within the G10), it could become more vulnerable to volatility.”
“In the meantime, any USD gains are likely to be differentiated in the immediate aftermath of the minutes. This could be temporarily concentrated against some of the dollar bloc “” especially NZD “” following a relief rally in recent days but we remain long AUD/CAD. In USD/CAD, we continue to see FV situated above 1.30.”
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