Head of FX Strategy
The spin from yesterday’s release of the Federal Open Market Committee minutes was somewhat different than it was after the changes to the official FOMC statement released at the early May meeting. Back then, the Federal Reserve’s introduction of “symmetric” to describe the inflation target was perhaps seen as an attempt to not scare the market into believing that the Fed would respond too zealously to further rises in inflation now that the 2.0% inflation target is properly coming into view. This time around, at least judging from the reaction in US yields and the unwinding of Fed rate hike anticipation, the language in the minutes was seen as more dovish, as the Fed is seen as more willing to tolerate inflation on the high side of 2% for a “sustained” period before hiking further.
The takeaway is that the US central bank seems to want to err on the side of not cutting the recovery short and being fully convinced that inflation will stay within the target zone.
As well, other language suggested that many Fed members are concerned about the shape of the yields curve and that the Fed is reaching an inflection point on forward guidance, with the policy rate soon reaching a level at which it begins to act as a restraint on the recovery. The June FOMC meeting is shaping up as an important one for that forward guidance, and the odds of only one more hike after a June hike (which is still priced near 90% certainty) have picked up sharply since yesterday.
In FX, the fairly sharp reaction in US yields to the downside has been fairly muted outside of USDJPY, which suffered a fresh, powerful sell-off leg overnight that took the pair to new local lows and well back below 110.00. The action suggests that 110.00+ was a bridge too far for USDJPY, and the top could very well be in for that pair if US yields have also topped for now.
Note that the 10-year benchmark, having recently launched a break of the critical multi-year range at 3.00-05% dropped back below 3.00% overnight, although arguably, the key local break is closer to 2.95%.
Across markets, the takeaway for the moment in the wake of these FOMC minutes may be that it is time to re-engage the “Goldilocks” scenario, as European Central Bank tapering plans are sidelined for the duration by low inflation, weaker data, and Italian politics, while the Fed now appears to want to decelerate responsiveness to inflationary data.
For risky assets worldwide, the lower long US yields are an important boost, and it doesn’t hurt that the Turkish central bank finally responded to the meltdown in the lira and jacked the interest rate by 300 basis points yesterday, while the political leadership in Ankara were also cowed by the recent weakening of the currency and has sent the right signals as well.
Other EM currencies have also rallied in relief on the combination of lower US yields and the TRY relief.
The USDJPY rally turned hard over the last few sessions as US yields did likewise. The pair may have topped for now if long US yields have done likewise – the jury still out on the latter. Resistance now comes in the at the 110.00-25 zone that was the focus on the way up.
The G-10 rundown
USD – yesterday’s FOMC minutes are a strong setback for the US dollar until either the market’s interpretation is proven wrong, or strong US data pushes back against the Fed’s stance on policy.
EUR – EURUSD didn’t achieve much of a bounce on the US-yield negative developments late yesterday, but hard to see powerful new lows for the cycle here unless something in Italy sees a new aggravation of EU peripheral spreads.
JPY – the JPY, not surprisingly, proving the most responsive to the shift in the yield outlook, as US short rates saw the most sizeable drop in some time yesterday. If markets indulge in the Goldilocks trade, however, the JPY may not appreciate across the board if risky assets rally, even if USDJPY has topped for now.
GBP – sterling in a better place despite yesterday’s slight CPI miss if risk appetite returns. A decent data point and a sharp single day rally in GBPUSD could suddenly alter the tactical outlook for GBPUSD as it would offer a reasonably compelling divergent momentum setup, but let’s see.
CHF – EURCHF put in a bounce later in the day yesterday and closed near the 200-day moving average. We have likely reached or are near reaching the SNB’s intervention zone, and EURCHF may not decline much further anyway if the Italian political situation can’t produce a further peripheral sovereign yield spread widening.
AUD – The AUDUSD situation in limbo at the moment, though still leaning lower, if needing a fresh sell-off to prove the point. To the upside, the rising trendline break is perhaps the dominant feature and is the key focus for whether the downtrend is maintained. That trendline is above the also important former low around 0.7650, so we’ll call the 0.7650-75 are the key pivot zone for now.
CAD – USDCAD is fibrillating in a tight zone between 1.2730 and 1.2900+, with the latest developments less supportive for the USD and oil still elevated. The outlook very much in limbo until the pair can engineer a break.
NZD – the AUDNZD rally very much intact, but needs to draw fresh blood to the upside to convince that 1.1200+ is achievable. NZ yields have been a negative pull on the currency in recent weeks after the Reserve Bank of New Zealand’s dovish statement at the May meeting.
SEK – 10.20-25 has held back the sell-off in EURSEK, the key pivot area for whether the zone to 10.00 will open up here. To the upside the 10.35 area is the first one of note, followed by 10.50.
NOK – EURNOK teasing with a break to new lows before shying away – still the chart points lower unless the pair backs up sharply into the old range.
Upcoming Economic Calendar Highlights (all times GMT)
• 0815 – US Fed’s Dudley (Voter) to Speak in UK
• 0830 – UK Apr. Retail Sales
• 0830 – ECB’s Praet to Speak
• 1130 – ECB Meeting Minutes
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Apr. Existing Home Sales
• 1435 – Fed’s Bostic (Voter) to Speak
• 1700 – UK BoE’s Carney to Speak