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FX Update: FOMC minutes: little to-do about almost nothing

Forex 4 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  The market tried to react to hints in the FOMC meeting minutes released late yesterday that an eventual asset purchase taper will find its way onto the Fed agenda, but the wording was too lacking in urgency or specifics to deserve much of a market reaction. Elsewhere, the gyrations in risk sentiment yesterday in the cryptocurrency market were an interesting diversion and wobbly risk sentiment and weak industrial metals prices are a headwind for the Aussie.

FX Trading focus: FOMC minutes deserve little comment. AUD negative focus

The US dollar and Fed rate expectations tried to react strongly to the release of the FOMC Minutes late yesterday in the wake of the worst crypto-quake in quite some time, which had both boosted treasuries and spooked equities and then mostly reversed before the release of the minutes. The reaction may have been exaggerated by positioning having been discombobulated by the inter-market action, but the knee-jerk higher in rate expectations and in US treasuries looked exaggerated, as did some of the headlines from these minutes, which touted “taper talk” which hardly amounted to anything. The key phrase in focus was: “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” By the end of the trading day and certainly by mid-day today – the knee-jerk reaction was erased because after all: setting a vague commitment down the road to “begin discussing a plan” is hardly a committal to do anything soon. Louder signals would be an adjustment of forecasts in the June projections, changes to the statement, or a Jackson Hole hint in August.

Still, the still wobbly risk sentiment deserves focus even if the FOMC minutes, as GBPUSD and EURUSD are just hanging in there after breaking higher and need to avoid much more downside to cement that the near-term direction remains higher – that likely requires a relatively positive risk sentiment backdrop, EU yields continuing to march to new highs, and rangebound US treasuries. A close below perhaps 1.2150 in EURUSD and below 1.4100 in GBPUSD takes the move. And some weakness in the commodity space has the commodity dollars still stuck in the range versus the greenback here. On that note, China’s warning on commodity price rises yesterday has surprisingly not inflicted more harm on the Aussie, where have traded in a tight range between 0.7675 and 0.7900 for more than five weeks. It’s rather remarkable that the Aussie has hung in there as well when its top export to China, iron ore, is at risk as China is asking for domestic companies to try sourcing iron ore from other countries in its ongoing showdown with Australia over what it views as unacceptable behaviour.

CAD traders – watch out for BoC Governor Macklem today if he felt his recent warnings on CAD were under-appreciated.

AUDJPY is a bit more technically interesting here than the incredibly rangebound AUDUSD, as AUDJPY recently tried new high for the cycle. This is a traditionally solid risk-proxy within G-10 currencies, but is more likely sensitive at present to swings in safe haven yields on the JPY side (lower yields = stronger JPY) and any further general risk- and especially commodity weakness on the AUD side. Recent developments in commodity prices most important for Australia, especially iron ore, have me leaning for AUD weakness here, although directional momentum has been hard to come by here for months, and we have yet to see a more determined sell-off here. A close well above 85.00 frustrates the bears for now, while a close below 84.00 begins to see bearish momentum picking up more.

Source: Saxo Group

Table: FX Board of G-10+CNH trend evolution and strength
Note the weak readings across the board as nearly everything is mean reverting, with even the gold and silver readings weakened a bit today by mean reversion in those markets after new local highs in gold.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
We are seeing AUDUSD trying to flip negative and EURCHF to flip positive, but we have been fooled here before, and it is disappointing that the move above 1.1000 in the latter yesterday has not stuck. Note that AUDJPY discussed above is on the verge of a flip to a negative trend on a weak close today or tomorrow. Also note EURSEK, where the flip to positive only gains meaning with a move north of 10.20-21 on the chart.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US May Philadelphia Fed Survey
  • 1230 – US Weekly Initial Jobless Claims
  • 1400 – Canada Bank of Canada to release Financial System Review
  • 1430 – US Fed’s Kaplan (non-voter) to speak
  • 1500 – Canada Bank of Canada Macklem Press Conference
  • 2300 – Australia May Flash Services PMI
  • 2301 – UK May GfK Consumer Confidence
  • 2330 – Japan Apr. National CPI
  • 0130 – Australia Apr. Retail Sales


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