Hawks contradict dovish FOMC minutes
FX Consultant / IFXA Ltd
· Loonie undermined by weak retail sales
· Yellen’s Jackson Hole speech key focus next week
· Thin markets ripe for risk aversion
She’ll talk. We’ll listen. We hope she’ll be clear. Photo: US Federal Reserve
By Michael O’Neill
If you listened to Messers Williams, Dudley, Butler and Lockhart this week, you can be forgiven for believing that not only will the Fed hike rates in 2016, there could be two hikes and one of them in September.
If you read the Federal Open Market Committee minutes, you may be wondering if the above mentioned Fed presidents were even at the July 27 meeting. The minutes suggested that the committee was content to remain very cautious and willing to await additional data to evaluate the strength of the recovery and the inflation outlook.
The FX markets voted with their wallets. They sold US dollars.
So, who is wrong? Is this week’s quartet of Fed speakers deliberately trying to mislead traders or are they sending a not so subtle signal that the market has misread the Fed’s intentions? The answer to those questions may be found on Friday, in Fed chair Janet Yellen’s speech at Jackson Hole
Loonie, oil and the greenback
Canadian dollar direction continues to be driven by two key factors; US dollar sentiment and oil prices.
Oil prices have risen steadily this week, from a low of $44.37 on Monday to a peak of $48.72 on Friday. Optimism surrounding the prospects of a price support mechanism being agreed to at the “informal” Opec meeting in Algiers at the end of September has triggered a short squeeze in WTI and Brent.
Traders have ignored reports that Saudi Arabia’s record crude production in July, will be exceeded in August.
The August 9 Energy Information Administration Short Term Energy Outlook said it “expects global oil inventory builds to average 0.5 million b/d in the second half of 2016, limiting upward price pressures in the coming months”. Bullish traders were unfazed.
The steep WTI uptrend following the break of resistance in the $43.50 area remains intact while prices are above $47.75 which if broken should lead back to $5.08, the 38.2% Fibonacci level of the August range.
The prospect of Janet Yellen adding clarity to the US interest rate debate at Jackson Hole, should keep the US dollar within the confines of the current trading bands.
If so, USDCAD should be confined to a 1.2700-1.2950 trading range in the week ahead.
Chart: USDCAD Hourly
Source: Saxo Bank
Canadians aren’t spending now, but soon will be
StatsCanada released disappointing retail sales data on Friday. Retail Sales declined 0.1% vs. expectations for a gain of 0.5% while the ex-autos component was down 0.8% vs. forecasts for a gain of 0.5%.
USDCAD rallied on the news but quickly retreated. Many economists view this report as merely a blip and expect a big rebound in the rest of the year thanks to child benefit cheques that started arriving in July.
Chart: Canada Retail Sales
Source: Statistics Canada.
Manoeuvring into risk aversion?
Are Russia military manoeuvres just that? Are they just part of the annual military exercises that are planned for September? Or is the 40,000 Russian troop buildup near the Ukraine border a sign of something more ominous?
Politicians in the Ukraine fear the worst. Ukraine has reportedly put all its troops along the Crimea border on high alert. On Thursday, the prime minister said “we don’t rule out a full-scale Russian invasion”.
According to a Reuters article, Russia’s actions are merely political posturing and a negotiating tactic to get the Western sanctions against Russia removed.
The US and NATO are doing their part to ensure that tensions remain high. NATO has moved or is moving up to three battalions of troops to Eastern Europe ostensibly to deter Russian aggression. It isn’t much of a deterrent. A battalion is around 800 soldiers. Three to five battalions equate to 2,400-4,000 soldiers. Russia already has 40,000 ready to go.
New inflammatory headlines or renewed hostilities can drive risk aversion fears to the forefront of FX markets next week especially since Janet Yellen’s Jackson Hole speech will overshadow US data releases and isn’t until the end of the week.
The week ahead
The Dog Days of summer are over. According to the Old Farmer’s Almanac they ended on August 11. You wouldn’t know it from FX market action. Thin markets have seen exaggerated moves on dubious data points and comments from various policymakers. And the coming week is expected to deliver more of the same, especially since it is prime vacation time for many traders, before the sprint to year end that starts in September.
The major US data is back-loaded to Friday with the release of GDP, CPI, PCE and consumer sentiment. Durable goods orders will be the major entertainment on Wednesday.
There are other important data releases elsewhere including Eurozone PPI on Monday and UK housing prices and Japan CPI on Thursday.
The wait for Janet Yellen’s speech at the Monetary Policy Symposium in Jackson Hole on Friday will likely overhang markets all week and overshadow all data releases. There are some concerns that she could use the speech to give markets a “heads-up” on future policy action.
The week that was
Traders didn’t have a lot of events or data to look forward to this week, except for GDPUSD traders, so activity was expected to be fairly subdued. For the most part it was.
Monday started off slow and a bit of profit taking helped the US dollar recoup some losses stemming from the previous Friday’s weak US retail sales report. That move didn’t last.
In Europe, GBPUSD dropped below 1.2900 ahead of UK data later in the week and EURUSD drifted higher. San Francisco Fed president John Williams released a paper suggesting a higher inflation target is needed which woke up dollar bears. By the end of day in New York, US equity indices had closed at new record highs.
Tuesday, Asia traders reacted to John William’s report and sold US dollars. The Reserve Bank of Australia minutes led to initial AUDUSD weakness but that didn’t last. USDJPY punched below 100.00. GBPUSD had a good day supported by higher inflation readings and EURUSD was over 1.1300.
The bearish sentiment became bullish in New York when New York Fed president William Dudley said that a September rate hike was a possibility.
On Wednesday, Asia walked into a raging interest rate debate. Atlanta Fed President Dennis Lockhart added his voice to the September rate hike chorus. The US dollar was in demand but traders were cautious as they awaited the FOMC minutes. They were right to be cautious. The FOMC minutes showed a divided and very cautious committee. The verdict was deemed doviish and the US dollar sank.
Thursday, the FOMC minutes led to broad-based US dollar selling. Better than expected employment data in Australia gave AUDUSD a boost. A Japanese finance ministry official was whining about “excessive FX moves” which helped lift USDJPY back above 100.00. A surprisingly strong UK retail sales figure gave an added lift to GBPUSD. The bearish US dollar sentiment fuelled oil price gains. The US dollar ended the day near a two-month low against the euro.
– Edited by Clare MacCarthy