FX Update: FOMC minutes: little to-do about almost nothing
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.
Chart: AUDJPY
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.
John Hardy
Head of FX Strategy
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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.
Chart: AUDJPY
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.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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