All eyes on FOMC meeting minutes

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There is a distinctive “risk-off” feel emanating through financial markets this morning, with global equities taking a sharp leg lower as the hydrocarbon market continues to exhibit weakness and is having trouble generating a positive bid tone.  Foreign exchange flows are seeing investors rotate into traditional safe-haven assets, with commodity currencies seeing an exodus of capital and the Japanese yen being one of the main benefactors of the flight to safety.  The collapse of USDJPY as the yen attracts safe-haven flows put downward pressure on the regional equity index, with the Nikkei ending its session lower by almost 2.5%.  The pessimistic tone to the marketplace has been hard to shake, with the negative price action for equities seeping over into European markets, where the majority of the bourses are well in the red midway through their trading session.

Overnight developments were highlighted by the release Reserve Bank of Australia’s monetary policy decision, where the central bank elected to keep the overnight cash rate on hold at 2.0%, as market participants had expected heading into the release.  While the lending rate remaining unchanged was not a surprise, Governor Stevens and the RBA did craft a statement that took a slightly more dovish tone than we’ve seen previously, highlighting that while there have been positive developments in rebalancing the Australian economy, the appreciation of the domestic currency as of late could complicate the positive adjustments.  Highlighting that part of the recent appreciation in the aussie was a factor of increasing commodity prices, but also a function of monetary policy developments elsewhere in the world, Stevens seemed displeased at the apparent challenges a strengthening domestic currency poses to the rebalancing of the Australian economy.  Noting that should inflation remain low, the RBA had further scope to make monetary policy easier, firing a warning shot to market participants the board isn’t overjoyed with the current level of the domestic currency.  As a result, the aussie is lower against the greenback by almost 1.0% this morning, with softer commodity prices also adding weight to AUDUSD.

The RBA statement should be of particular interest for loonie traders as next week approaches, as there is the potential for a similar communique to be witnessed from the Bank of Canada.  While there have been some positive developments to start 2016 from an economic growth perspective, the sharp appreciation of the domestic currency over that time period could provide complications to foster the goal of re-balancing towards a manufacturing-based export economy.  Though Poloz has recently abstained from mentioning any concerns with the sharp appreciation in the loonie given monetary policy adjustments abroad, there is the potential the BoC could strike a similarly cautious tone as the RBA, to highlight the concerns around the strengthening of the loonie choking off the positive developments in the non-energy export sector.  Trade balance figures for the Canadian economy over the month of February are due to be released later this morning, and expectations are for the trade deficit to remain relatively stable around January’s levels.  If anything, we would caution there could be a topside surprise to today’s release given the relatively low level of the loonie over that time period, combined with positive momentum carried over from January, but given the February data is somewhat stale, the Bank of Canada will likely be looking past today’s numbers.  We would suggest that if there is a lack of constructive developments in the non-energy export sector over the month of February, the continued appreciation of the loonie over the month of March and early April might cause Poloz to take a page from Governor Steven’s book.

As we get set for the North American open, S&P equity futures are pointing to a weaker open when the bell rings, while front-month WTI is still having a hard time eliciting a solid bid tone.  The greenback is firmer against the majors, though the ISM Service PMI survey is due out at 10:00EST, and will likely provide dollar traders and the US interest rate market with some direction ahead of tomorrow’s FOMC meeting minutes.

Further reading:

USD twice shy of two doves going hawkish

UK Services PMI at 53.7 – GBP frowns

Get the 5 most predictable currency pairs

About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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