Why the FOMC minutes might matter 5Apr16

Why the FOMC minutes might matter

Michael O’Neill

FX Consultant / IFXA Ltd


  • FX shaky on risk aversion
  • US and Canadian Trade data weaker than expected
  • Fed minutes may hold clues

Maybe we should listen even more carefully than usual to the FOMC minutes. Pic: Fed Press

By Michael O’Neill

Sometimes the minutes of the Federal Open Market Committee meeting mean something to traders and sometimes they don’t. Wednesday’s release of the minutes from the March 15-16 meeting may fall into the former camp. Fed chair, Janet Yellen, has regaled markets with her insights at the post meeting press conference and again on March 29 and she was very dovish, both times. Arguably, the dovish conclusion comes because she was emphasising the risks to the Fed’s view rather than emphasising the strength of the economy. Her caution may have been wrongly interpreted.

It is a tad unlikely (but not impossible) that the Fed chair would spin a tale to markets that sharply deviated from the tone of the meeting. You will recall that there was only one dissenter, Kansas City Fed president, Esther George. In a normal world, that would suggest that the other nine voting members agree with her spin.

Boston Fed President, (and voter) Eric Rosengren said in a speech yesterday, “financial market expectations of only a very slow removal of monetary policy accommodation could, in his view, prove unduly pessimistic”. A mere week after the FOMC meeting, St. Louis Fed president (and voter) James Bullard told Bloomberg that “a strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April”.

Those comments are hawkish and both gentlemen were at the same meeting as Ms. Yellen. Tomorrow’s minutes may show a cautiously hawkish Fed getting ready to hike rates.

Is BoJ baiting a bear trap?

At the end of January, the Bank of Japan stunned FX markets when they announced “negative rates”. USDJPY soared over 0.300 points, from 118.40 to 121.60. But it didn’t last. USDJPY started to retreat and retreat and retreat some more. This morning USDJPY touched 110.27, which pretty much erased all of the yen’s losses since the October 31, 2014, surprise quantitative easing announcement.

A weak yen was a cornerstone of Japan’s reflation initiatives so it is hard to believe that governor Haruhiko Kuroda is very pleased with these developments. Yesterday’s Tankan survey included an “Inflation Outlook of Enterprises” report which pointed to a decline in inflationary expectations to 1.3%. five years ahead from 1.6% in December.

There have been more than a few cases of “pseudo intervention” in the past few weeks, such as “BoJ checking rates” headlines or comments from government officials. They have had only brief and minor impacts.

Another issue is that Japan is hosting the G7 Summit May 26-27, 2016. There are some who believe that the February G20 meeting in China led to a tacit agreement to either weaken the US dollar or stop devaluing domestic currencies. Since that meeting, the US dollar has declined vs. the majors providing some support for that view.

USDJPY is bumping into major support in the 110.00 zone that if broken could turn very nasty. US dollar bears would jump all over that move but if they do, it may be at their peril. It wouldn’t be the first time the BoJ baited a bear trap.

Loonie stumbles on soft trade data.

USDCAD took a tumble due the recent bout of risk aversion trading and today’s weaker-than-expected Merchandise Trade report. The Bank of Canada is counting on non-energy exports to fuel the domestic economy and today’s data has tripped up that expectation. No matter how you slice it, the report was soft.

Exports fell 5.4% led by consumer goods and energy. However, it may be just a blip and not anything more than that. Canada had three months of strong export gains so perhaps today’s report is just a reminder that the economy is not even close to running on all cylinders.

Chart: Canada Merchandise Trade

Source: Statistics Canada

Canadian dollar outlook

The Canadian dollar is undergoing a correction of sorts. The steep plunge from the January peak finally found a floor in the 1.2855 area which also represented the low from July 2015 and the top prior to April of that year. The bulk of the decline is due to the rally in oil prices and the lack of an easing bias by the Bank of Canada. In addition, the Loonie has also benefited from the general decline of the US dollar against the G7 currencies.

BoC governor Stephen Poloz sounded fairly upbeat in his assessment of the outlook for the Canadian economy on March 9. The senior deputy governor, Carolyn Wilkins, may reinforce that sentiment today at 1600 GMT.

Friday’s Canadian employment report may surprise to the upside, if only because last month’s data accuracy was a tad dubious. At the same time, the fact that the data accuracy is questionable means that any impact on USDCAD should be fleeting.

USDCAD technicals:

The intraday USDCAD technicals are bullish while trading above 1.3100 with today’s break of resistance at 1.3160 pointing to further gains through 1.3220 to 1.3305. Failure to break above 1.3220 argues for additional 1.2920-1.3220 consolidation.

Longer term, a decisive break above 1.3220 would both, negate the downtrend from January and suggest that a short term floor is in place at 1.2855 while pointing to further gains to 1.3470.

Chart: USDCAD 4-hour

Source: Saxo Bank

– Edited By Clare MacCarthy

Michael O’Neill is an FX consultant at IFXA Ltd.

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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