By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
U.S. dollar traders were not impressed by the July Federal Reserve meeting minutes. The greenback ended the day slightly lower than where it started before the minutes were released and unchanged for the day against all four of the major currencies -- the euro, British pound, Japanese yen and Canadian dollar. The FOMC minutes showed policymakers split on how soon a rate hike was needed. Some members backed a July hike but others wanted to see more data on the economy and inflation. They expressed concern about medium-term Brexit risks and the impact that low rates would have on financial conditions. As a result, “several Fed officials” felt there was ample time to act before inflation rises. In other words, the next move for the Fed will still be a rate hike -- yet the group as a whole is in no rush to tighten. Fed President Dudley -- who spoke Tuesday and is scheduled to speak again Thursday -- sees a possible 2016 rate hike and fellow voter Bullard agrees that the central bank is “very close” to reaching its goals. So a hike this year is still on the table.
Given the recent weakness of U.S. data and the strong downtrend in USD/JPY, U.S. dollar traders were looking for unquestionable hawkishness. Instead they received no additional clarity on whether rates will rise by December and were simply told that the Fed is still in wait-and-see mode. The corresponding drop in the U.S. dollar, decline in Treasury yields, turnaround in U.S. equities and decline in Fed-futures rate hike odds show that investors are disappointed. The fact that USD/JPY is still holding above 100 -- yet ending the day near its lows -- is a bad sign for the currency pair heading into Asia. For the past week, traders sold every rally in USD/JPY and with the FOMC minutes behind us, we could see another push below 100. We can’t expect any help from Thursday’s Philadelphia Fed survey, but Fed Presidents Dudley, Williams and Kaplan are scheduled to speak and their comments should be positive for the dollar. In the meantime, keep an eye on EUR/USD, which is still trying to break 1.1300 on a closing basis.
Sterling shrugged off Wednesday morning’s stronger-than-expected jobs report. Although the PMIs showed a rapid deterioration in labor-market conditions, the number of people filing for jobless benefits fell -8.6k in July, leaving the unemployment rate steady at 4.9%. Average hourly earnings -- probably the most important part of the report -- grew 2.4% year-over-year. That was in line with expectations but stronger than the previous month. So far this week, we’ve seen nothing but stronger U.K. data and that trend is likely to continue with Thursday’s retail sales report. Even though consumer confidence plunged after Brexit, we saw heavy discounting fuel demand, according to a recent survey from the British Retail Consortium. Like USD/JPY, the trend in GBP/USD has been lower. Yet between stronger U.K. data and significant short positions, we are looking for a squeeze higher.
While the Australian and New Zealand dollars sold off against the greenback Wednesday, both ended the North American trading session well off their lows. Stronger Australian employment numbers were scheduled for release Wednesday evening. Yet a higher number was not a given because the service and construction sectors reported weaker labor-market conditions whereas manufacturing reported strong job growth according to the PMIs. The New Zealand dollar failed to hold onto its post-employment report gains. New Zealand’s unemployment rate dropped to 5.1%, beating estimates of 5.2%. Employment also saw a positive change of 2.4% vs. 0.6% expected and NZD PPI data came in at 0.9% vs. -1.0% previously. Dairy prices rose strongly -- which combined with the healthier data -- should have been enough to drive NZD to fresh highs, but the currency’s ability to extend higher suggests commodity currencies have peaked. There was no data from Canada, but unlike AUD and NZD, CAD held onto its recent gains as oil prices continued to rise.