- Forex today was mixed, but the dollar stole the show which rallied into and post the hawkish FOMC minutes.
- The greenback managed a pretty impressive run on Wednesday, climbing from 95.07 and making a high of 95.66.
- US yields eventually started to move higher after the FOMC minutes, with the benchmark 10-year yields rising from 3.17% during the event, to 3.20% following the market’s absorption of implications from the FOMC’s tone.
The day was centred around the FOMC minutes. Analysts at TD Securities explained that the minutes from the September FOMC meeting continued to show broad support for a gradual pace of rate hikes and confirmed a majority of participants support hiking above the neutral rate, consistent with the distribution of the dot plot, while only a couple were said to oppose a restrictive policy absent clear signs of overheating”
“The minutes also sought to downplay the significance of removing “accommodative” from the statement by noting this does not reflect any change in policy and attributing it to “considerable uncertainty” surrounding estimates of the neutral rate. Housing starts for September were slightly below the market consensus at 1.20m units (market: 1.21m), reflecting a 5.3% decline on the month. Permits were also weaker than expected at 1.24m, down 0.6% m/m (market: 1.275m).”
For the US dollar, it managed a pretty impressive run on Wednesday, climbing from 95.07 and making a high of 95.66, well above the recent session’s ATRs and considering it was trading down at 94.70’s on Tuesday, that is a profound comeback. The question we are all asking is whether it is sustainable if not plausible that it can run even higher – Technically, it has already breached the 9th Sep highs and is just a trade or two away from the earlier 4th Sep double-top highs of 95.74. Fundamentally, whether or not the market likes a strong dollar and US yields, if the fair value is higher, then that is something that the market needs to come to terms with. Once it does, then, yes, the dollar can run higher all the while that the US economy continues to perform on a strong footing and so long as investors keep their faith in the greenback as a safe haven – And let’s face it, there is far less scope for a rush back into EM-FX, for example, and until there are solutions to the uncertainties and risks surrounding Brexit, Italy, Greece, China’s slow down … (the list goes on), the dollar, US economy and assets retain their appeal to investors looking for a place to invest their idle capital.
Currency action
EUR/USD was suffering and actually pierced 1.15 the figure to score a low of 1.1498 with wider bond spreads and angst over the Italian budget and EU summit where Brexit is up in the air. The pair started off up at 1.1578, dropped to 1.1526 in London trade ahead of the NY handover and oscillated between there and 1.1548 before bulls gave in headed into and after the FOMC minutes. Cable was offered from the off on Wednesday after the CPI data missed expectations, kicked while it was down licking its negative Brexit headline wounds. CPI arrived at 2.4 pct vs 2.6 pct f/c – However, this is still above the 2.0 pct BoE target – So, there is probably ore priced in tot he downside with respect to Brexit worries than inflation – In fact, cable had dropped from 1.3190 to 1.3149 before the release of CPI. GBP/USD was ending the North American day at 1.3128 -0.42% from within the NY range of between 1.3149-1.3100. With respect to Brexit – “much more time” is needed to reach a Brexit deal according to EU’s Barnier and May needs to come away with that this week – or we could be in for a very rocky ride to the downside for the pound. As for the cross, its a complicated mix of politics that is in the driving seat and EUR/GBP was actually flat into the NY close by 0.8770 with cross flows of a stronger dollar, Italian and Brexit angst and markets preparing for a dovish outcome form the ECB next week. USD/JPY was bid to the 112.60’s following the FOMC minutes despite a risk-off feel in the broader financial markets. However, focus stayed on the US stocks which did actually manage to get out of the blocks on the front foot which stipped the yen of some strength right off the bat. USD/JPY traded to 112.38 before the FOMC minutes and then 112.60’s for a 112.69 NY session closing high and high for the day ad US yields climbed – 10-year yields got into 3.20’s% and it was actually a strong mix of the dollar, EM-FX, US yields and stocks all in correlation that weighed on the yen. As for the Aussie, it started off on the wrong foot with weakness in the EMs during the European markets although the turn-around on Wall Street lifted the pair ever so slightly, lead by AUD/JPY. However, the Aussie gave in ahead of the FOMC and fell from 0.7132 to 0.7106 and closed around there as traders get set for the Aussie jobs report in the Tokyo opening hour. Eyes will stay on the performances of EM-FX as the TRY and BRL recover well. However, USD/CNH is back within a chop-sticks reach of the ascending channel’s prior support level at R2 located at 6.9340/50.
Key notes from US session:
- FOMC minutes: Some members see the need for raising rates above neutral
- Wall Street fails to extend rally as trade concerns reemerge
Key events ahead:
Aussie jobs: “After our “seasonal” dip in August didn’t materialize, we look for employment to lift by +25k in September (mkt +15k although more at +20k) and combined with a dip in the participation rate to 65.6%, the unemployment rate could drop to 5.1%, a hair above the RBA’s soft target of 5% (mkt 5.3%,” analysts at TD Securities explained.
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