Dollar and Yields Ignore FOMC Minutes, Retreat

Talking Points:

• Dollar and Yields Ignore FOMC Minutes, Retreat
• Euro Rebound Looks Flimsy on Draghi Comments, Capital Markets’ Struggle
• Australian Dollar Finds Little Support in Jobs Data, China Trade

Dollar and Yields Ignore FOMC Minutes, Retreat

The Fed inched closer to its first rate hike this past session, yet the Dow Jones FXCM Dollar Index (ticker = USDollar) nevertheless fell for the fourth consecutive session. This wasn’t just an unusual response from the world’s most liquid currency though. Rather, the sedate – and in some ways contradictory – response was shared by the broader financial markets. The hurdle is in breaking complacency. This is an environmental condition that has both negative and positive aspects. The ‘status quo’ warps speculative appetites, drains momentum from existing trends and numbs the market to fundamental change. Once again, the lynchpin is volatility.

Trying its hand at moving the market this past session was the FOMC minutes. The transcript of the central bank’s policy meeting three weeks ago wasn’t exactly revelatory. In the June 19 meeting, we were offered the standard short-form policy report along with the quarterly updated forecasts and Chair press conference. The minutes reinforced what was already suggested previously for monetary policy bearing, but there were a couple updates and highlights of merit. Giving some tangibility to what the market had already projected, the Fed suggested that a likely $15 billion final Taper at the October 29 meeting would bring the QE3 program to a close. That is a first and critical step to eventually return to rate hikes. And, the optimistic view on growth and balanced risks moving forward furthers that eventuality.

Another highlight in the minutes was the suggestion that “some” officials believed investors were too complacent with the risks that exist in the market. This is a concern that a few members have expressed individually before and is gaining a louder voice amongst global policy officials (including other central banks and the Bank of International Settlements). Under normal conditions, forward-looking markets would work more diligently to price in rate forecasts and risk trends would heed the speculative risk warning. But these aren’t exactly ‘normal’ times. Ahead, the docket carries a few economic releases – a Bloomberg Economic Survey, jobless claims and wholesale trade figures – but far more interesting is the next round of Fed speeches. Esther George is a known hawk, but this is a first chance to hear Stanley Fischer’s stance.

Euro Rebound Looks Flimsy on Draghi Comments, Capital Markets’ Struggle

The Euro wasn’t putting up a particularly-strong performance this past session, but it would still gain against the US Dollar. For such a contrast in recent fundamentals – much less the medium-term outlook – this is impressive. For the shared currency, ECB President Draghi’s comments didn’t’ seem to carry the weight he intended. The central banker remarked that threats to price stability were present and exchange rate behavior was one of the influences. This warning is not unfamiliar, however, and we have already seen a first round of accommodation (action) absorbed. What matters now is whether capital continues to flow in reassured by further central bank support or leaves on repatriation. Demand for EZ government debt notably slipped this past session (sovereign concerns) and the banking segment of the equity market is still significantly under water (financial market concerns). If either issue gains serious traction, the euro will fill the blow.

Australian Dollar Finds Little Support in Jobs Data, China Trade

Event risk this morning was relatively heavy for Aussie traders – though it wasn’t heavy enough to jump start more prolificprice swings. Locally, the June employment data may have produced a better 15,900-person net increase on the headline figure, but the full-time change and uptick in unemployment erased that positive slant. Meanwhile, China – Australia’s largest trade partner – reported a June trade report with a weaker-than-expected $31.6 billion surplus. Though still very high and backed by import growth, the Aussie dollar feels the adjusted balance.

Oil Suffering its Longest Tumble in 4 And a Half Years

US Oil (officially the benchmark WTI Crude Contract) has fallen for 8 consecutive trading days. That is the longest slide for the commodity since January 2010. Through traditional fundamentals, the weekly inventories report for July 4 showed another larger than expected drop while implied demand remained elevated. Yet, supply and demand, geopolitical issues and equity performance are not turning this market around.

Japanese Yen: A 30-Year Bond Auction Reminds of Japan’s Financial Spot

Japan’s Finance Ministry plans to sell a 30-year government bond (JGB) today. While there is unlikely to be any trouble with the sale, this serves as a reminder of another issue facing Japan. While the yen is exposed to risk trends and has lost the implicit ‘escalation of stimulus’ from the BoJ, there are systemic financial considerations beneath the surface – like who will buy long-term JGBs when Japan’s pension fund sells?

Emerging Market Currencies Extend Advance Led by Higher Yield

Emerging market capital markets were performing strongly this past session. The MSCI ETF jumped 0.6 percent without clearing recent range resistance and the Bloomberg EM sovereign bond index notched a new record high (144.55). This looks like a tail risk bid as we see the currency performances favor more depressed or higher yield units like the Russian Ruble and Turkish Lira.

Gold Producers Surge Higher, Metal Stays Put

Volatility measures for gold – the CBOE index and ATR derived from price – show a distinct quiet for the commodity as it hovers below $1,350 on measured volume. But perhaps there is an appetite building in other corners of the market that will spill over to the commodity. Of not this past session, the GDX gold mining ETF (a 0.96, 20-day correlation) surged to a four-month high his past session. **Bring the economic calendar to your charts with the DailyFX News App.

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INTRA-DAY PROBABILITY BANDS 18:00 GMT

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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