The Fed’s January FOMC minutes revealed a consensus among Fed members to raise rates, but the minutes offered up little more than studiously ambiguous double talk by suggesting a rate hike would be delivered “fairly soon”. Short-term dollar speculators were hoping the Feds would produce a more meaningful time frame, but dealers are left dangling. Just like the ever cautious Dr. Yellen, awaiting clarity regarding the yet-to-be implemented Trump policies.
Euro
The European election risk has undoubtedly influenced the weakness in the euro overnight, and to a lesser degree, the move was stretched by short-term speculators getting long USD dollar ahead of the FOMC. Dealers hoped the Feds would take this opportunity to lay their March Rate hike cards on the table, however, after touching a low of 1.0495, the EUR pivoted higher when leading centrist Emmanuel Macron agreed to an offer of an alliance from centrist Francois Bayrou. Euro investors breathed a temporary sigh of relief that this marriage would reduce Le Pen’s chance of victory.
The move higher was compounded by day trade speculators exiting euro shorts in a gradual fashion The euro then again gapped higher as weak pre-FOMC minutes shorts ran for the exits post-Fed obfuscation. However, ongoing concerns about increasing traction from far-right and anti-EU candidate Le Pen should keep the euro well offered and with so much ambiguity in the run-up to the first phase of the French election; the euro will be severely tested in the weeks ahead. If you need any further conviction, consider Le Pen’s tweets saying that the euro is “banker’s money” and “not for the people.” It is hardly a positive signal to the European investment community.
Australian Dollar
With RBA’s Lowe raising the bar for rate cuts, coupled with FOMC minutes double talk, the Australian dollar has bounced above .7700 as the USD dollar floundered across G-10. However, we need to keep in mind that the market has adopted a day trade mentality as positioning, positive or negative, gets quickly nipped for fear of getting caught wrong-footed in a market fraught with uncertainty. It is as if holding a position for over 3 hours is considered a long term trade in this environment.
Although the Feds were less hawkish than short term positioning was comfortable with, traders shouldn’t fall into the trap of thinking the Feds are not preparing for lift off, as this morning’s dollar sell-off was little more than pull-back from the market’s enlarged event risk view. Expect these types of position event moves to continue as dealers desperately grapple for conviction.
The AUD should remain constructive on the back of the short term carry and supportive commodity prices. However, with uncertainties in every pocket of the market abounding, global risk outlook certainly looks fragile which could impede any short-term move higher. Look for the European political risk to heighten while on the US rates front, traders will pay substantial attention to the incoming US economic data and remain vigilant and on guard for any comments from Camp Trump.
Australian CAPEX missed badly on the downside, coming in at -2.1% vs. -.05 % expected, but given the primary focus remains on external drivers, do not expect the Australian dollar to fall too sharply. However, it will certainly dampen topside momentum.
Japanese Yen
JPY/USD is all about short-term positioning and little more. The dip post-FOMC minutes was little more than a reflection of short-term punters unwinding positions after rolling the dice on an under-priced March Fed Rate Hike scenario.
The two divergent drivers, Eurozone political risk and a Fed Rate Hike, will likely keep the edges of recent support and resistance intact at ¥112-115. Given the overwhelming concern about the Eurozone election risk, thoughts of impending risk aversion will continue to keep the top side USDJPY in check as EURJPY selling if very much in play which favours the downside in the absence of economic clarity from Camp Trump. However, I do not see the battle of the dollar Bulls and Bears abating anytime soon, so get ready to ride that rollercoaster.