The Fed did not go all hawkish and the markets had very high expectations for such a hawkish sentiment. When expectations are not met, disappointment hits.
This is already a significant correction: a deeper dollar dive. Where will it stop?
So what did the minutes actually say? They included views from both hawks and doves.
The minutes
From the hawks: “several” saw that guidance signaled that normalization was too long. We already know that two voters dissented in the meeting.
From the doves: “some” saw rising risks to exports and growth due to the strength of the dollar. We already heard that from Dudley. They also saw risk in the global slowdown. They called for patience on changing the forward guidance and a “number” worried that a change in guidance (notably the “considerable time” wording) could in itself result in tighter conditions.
Contrary to previous minutes, it seems that the doves had the upper hand this time and that the members are more closely aligned with Yellen. The specific mention of the dollar didn’t add too much fuel to dollar bulls, to say the least.
And it’s not only the minutes that matter, but the analysis from Fed Watchers. The Journal’s Jon Hilsenrath focuses on the worries expressed on global growth and the strengthening US dollar. If the Fed is seen as worried about the US dollar, the US dollar responds to worries, especially as the a weaker dollar has disinflationary implications.
Rates may certainly rise later.
Market positioning
The dollar suffered a retreat that began earlier in the week: markets finally saw the greenback as overbought and it retreated, despite the strong NFP on Friday and the following Fed favorite JOLTS on Tuesday, that came out at the highest since 2001.
Towards the publication of the minutes, the dollar did strengthen in anticipation of hawkish minutes, as seen after previous meetings. The bar was already high and a “buy the rumor, sell the fact” was already baked in.
The actual text was not the “fact” that markets were looking to, but rather the opposite. Dollar bears re-emerged and the result was a spectacular fall of the greenback.
Market reaction
- EUR/USD broke above 1.27, and even peeked above 1.2750, the former double bottom, but this high line remains intact. The euro is ignoring German weakness.
- GBP/USD made a convincing jump above 1.61 and got close to 1.62. The pound has reasons to rise as a rate hike in the UK could now come before one in the US. The Bank of England convenes today.
- USD/JPY lost the 108 level and continued its descent. This is to the liking of Japanese authorities that were already worried about a weak yen. Yes, a currency devaluation can go too far.
- USD/CAD slipped to the low 1.11s, with CAD/USD rising above 90 cents. The C$ suffers from falling oil prices.
- AUD/USD jumped above resistance at 0.8820 and later ignored weak employment data in Australia.
- NZD/USD enjoyed a nice ride to 0.7950, and continues its recovery path after the RBNZ blows.
More: EUR/USD and GBP/USD sell opportunities after the FOMC minutes – RBS
What is the next direction of the dollar? Today we have the weekly unemployment claims in the US, that could remind us that the US economy isn’t doing that bad.
Share
