In a market starved for significant news, the FOMC minutes provided just enough talking points to keep the dollar bid as US bond yields nudged towards crucial resistance levels. However, the Fed's assortment of views on wage growth suggests the FOMC remains pliable during the transition phase from Yellen to Powell. In other words, the Fed stays in wait and see mode regarding inflation.
Of course, the market latched on to the dovish stuff as traders were partial to sell the dollar, but as is so often the case when interpreting the Fed's exercise in verbal gymnastics, the market got it wrong. The FOMC minutes were eventually deemed slightly more hawkish after suggesting economic growth will surpass their estimates which caused STIRT traders to nudge rate hike expectations higher through 2018 and providing a bump to dollar sentiment. But given the lack of follow-through, the jury remains out.
The exciting part of the equation today will be the return of China investors which should provide a spark to regional sentiment. But the jury is out on the currency markets and in particular the USDJPY which remains the primary vehicle to express currency sentiment.
So there lies the debate, interest rate hawks preach the FOMC had not seen last week’s sharp inflation report while the doves suggest a need for a string of convincing inflation prints before moving to the four rate hike camp.
Bond Markets
The bond market is confused, but as my first boss on the BondDesk was always quick to remind me, when in doubt Sell.
Oil prices
Tumbling oil prices got a reprieve at the end of the day after American Petroleum Institute data showed a drop of 0.907 million barrels in US crude inventories. Given all the noise about a shale production ramp, traders were expecting an increase in the warehouse when in reality improved pipeline infrastructure to the Gulf Coast and the decreased supply via TransCanada’s Keystone pipeline, sent Cushing inventories tumbling. But the firming dollar continues to thwart investor sentiment despite the bullish inventory data. By no means is the dollar returning to form so this upbeat inventory data could have some legs.
Gold Prices
It was a meltdown in gold markets overnight, and I’m not talking about scrap prices. But in reality, this should provide Gold investors with another opportunity to re-engage as the Fed fell well short of confirming a 4th rate hike in 2018. The minutes were more balanced in my view as the recent uptick in volatility will have as much bearing on Fed policy decision as the subtle rise in inflation.
G-10
The Euro
Disappointing euro price action from the long perspective continues to weigh on sentiment; bullish views continue to be challenged ahead of the Italian elections, as near-term convictions turn neutral to slightly bearish
The Japanese Yen
There remain substantial offers between 107.50-108 levels that are providing a cap on USDJPY, but Traders remains exceptionally cautious in either direction despite increasing signals for a structural demise in USD sentiment. While fiscal stimulus looks good on paper, we’re entering uncharted territory as the Fed pares back bond purchases while the Treasury issues absurd amounts of debt.
Malaysian Ringgit
We should anticipate more liquidity coming back to the market as mainland China investors return. While we’re nowhere near a make or break scenario for the ringgit, short-term sentiment remains tarnished by an unexpectedly faster rise in US bond yields. While this is mildly negative for local opinion, the main issue is investors are growing increasingly concerned about a quicker pace of interest rate normalisation from the Fed which could trigger regional capital outflow.
The FOMC minutes served up little more than a plate of confusion last night, so I expect G-10 along with Asia FX to remain in a state of limbo until Fed Chair Powell takes the podium later this month.