FOMC minutes unlikely to revive dollar’s fortunes

The US Dollar crumbled anew last week, suffering deep losses against all of its major counterparts. What started as a corrective pullback following the prior week’s forceful rebound turned into rout after January’s CPI data crossed the wires.

The inflation rate topped forecasts - sparking a brief burst of panic across financial markets - but ultimately underwhelmed. It registered unchanged from the prior month at 2.1 percent on-year, a limp result in the eyes of markets primed for fireworks after wage growth unexpectedly surged to a nine-year high.

That jump in wages stoked fears of a far more aggressive Fed rate hike cycle than markets had accounted for, sinking stock markets and putting the greenback on the offensive. When the headline price growth reading underwhelmed, those worries evaporated.

The narrative prevailing before February 2 is seemingly back at the forefront. That envisions a broadening global recovery forcing central banks to follow the Fed’s hawkish lead, narrowing the Dollar’s yield advantage and pushing capital flows toward now seemingly cheap alternatives.

Minutes from January’s FOMC meeting amount to the only significant bit of news-flow with potential to overturn trend next week. In the unlikely event that the committee sounds profoundly more hawkish, the US unit will find new vigor. More probably however, a cautious stance will lead to deeper losses. We changed our previously bullish outlook on GBP to neutral last week, citing ongoing Brexit concerns, and we remain on the sidelines this week with little to spark a bullish or bearish conviction.

Brexit talks took a slightly more considered approach late this week when the EU said that they would a ‘punishment clause’ from their Brexit rules and regulations, due to vocal opposition from both the UK and various EU members who thought the measures overly punitive. Whether the clause should have been inserted in the first place is a moot point. As we write, UK PM May is readying herself to speak with German Chancellor Angela Merkel and the outcome of this discussion could give some hints to EU talks in the month ahead of the European Council summit on March 2223. Despite ongoing difficulties in trying to form a ruling party in Germany, Chancellor Merkel’s opinion is highly valued within the EU and as such should be monitored closely by sterling traders.

On the UK data docket next week, December employment and wages data on Wednesday could provoke a reaction in GBP while on Thursday Q4 GDP numbers will be released. This is the second look at the UK fourth-quarter growth figures. The second quarter estimate of GDP is based on additional data and is produced later than the first estimate and provides a more precise indication of economic growth.

Volatility

Sterling remains range bound against the Euro and is unable to break out of the 0.86900 - 0.90300 range that has held firm since mid-September 2017, while against the US dollar sterling has shown slightly more volatility with a tendency to push to the upside. A lot of the movement in GBPUSD has been UD dollar driven and until the higher US yields/ lower US dollar conundrum has been fully explained, we advise a wait-andsee approach in the week ahead. The Japanese Yen put in a pronounced move of strength this week as the currency crafted a fresh 15-month high against the US Dollar. Price action in USD/JPY drove-lower Monday thru Thursday, finally running into a bit of technical support on Friday morning. This bearish move broke through the support-side of a range that’s been in-place for more than nine months; and making matters more interesting is the fact that of these fireworks happened with a backdrop of seemingly ‘good’ news.

BoJ Governor Haruhiko Kuroda was re-appointed for a second fiveyear term atop the bank. While this was largely expected throughout the week, the formal announcement on Friday morning comes-in around the same time as that support bounce; but given dynamics across the FX market, it would appear as though the Friday pullback is more related to an oversold US Dollar seeing a bit of short-cover ahead of a long holiday weekend in the United States.

After two weeks of heavy selling pressure amidst market-wide risk aversion, the sentiment-linked Australian Dollar launched a recovery against its US counterpart. Its appreciation was accompanied by a recovery on Wall Street and other stock exchanges as volatility cooled. The CBOE’s VIX, which came under manipulation allegations, fell below 20 on February 14th.

A slightly disappointing local jobs report failed to hinder the Aussie Dollar’s advance. There, Australia experienced an overall net gain in employment. In fact, the outcome even beat expectations. However, traders cared more about the contraction in the full time sector, which was the worst since September 2016. That was also accompanied with a decline in the labor force participation rate.

The following day RBA Governor Philip Lowe testified to the House of Representatives. He noted that the next rate move will likely be up and that “less monetary stimulus is appropriate at some point”. However, a key takeaway from the speech was that he didn’t “see a strong case for a nearterm policy adjustment”. This also brings us to what might be in store for the Australian Dollar going forward.

Australia’s economic calendar is lacking critical event risk in the week ahead. Yes, we do have the minutes of RBA’s February monetary policy statement and then the wage price index release. The former will probably echo the central bank’s reluctance to commit to changing rates for now. The latter could be a wildcard if strong wage growth inspires another bout of inflation fears (though the recent better-than-expected US CPI report failed to do so).

Given a static RBA outlook, the Australian Dollar will probably be most vulnerable to risk appetite and external factors in the coming week. We do have the FOMC meetings minutes coming up, but the details of the release will be tied to a rather uneventful monetary policy decision. With that in mind, the outlook will be neutral as the Aussie seems likely to continue tracking stock markets.

Argument

After a 12% drop at the beginning of February, Crude Oil Bulls are left with a dilemma. The fundamental bullish argument has not changed. However, the price shock that saw the price drop from ~$8/bbl has left more questions than answer.

The main argument of the Crude Bears has been the increased US Production weakening and potentially nullifying the efforts of OPEC. However, when looked at the OECD Crude Oil demand forecasts along with China import data, it’s difficult to ignore that more supply is what the market is demanding.

Recently, Saudi Arabia Energy Minister Khalid Al-Falih told reporters in Riyadh that if necessary, OPEC would push supply cuts to the point of presenting a small supply shortage. In short, as OPEC looks to be reaching their goal of getting supply to the five-year average, they remain hesitance to quitting too soon. The argument is that stockpile data may be inaccurate so OPEC will, “stay the course and make sure that inventories are where the industry needs them.”

Again, there are no guarantees in markets, but the key drivers of fundamental information from the global benchmark, OPEC and their production of Brent Crude seem to be working in favor of the Bulls, not the Bears of Oil.

Gold prices are on pace for the largest weekly advance since August and snaps a two-week losing streak with the precious metal rallying more 2.8% to trade at 1353 ahead of the New York close on Friday. The gains comes alongside a continued rebound in equity markets with all three major U.S. indices trading higher by more than 4% on the week.

A strong print on the U.S. January Consumer Price Index (CPI) on Wednesday saw gold prices rally to fresh weekly highs with the advance paring all of the early-February losses. The recent uptick in the inflation outlook has fueled expectations that the Federal Reserve may have to hasten the pace / scope of future rate hikes with Fed Fund Futures now pricing an 83% likelihood for a hike in March. Still, yields have struggled, trading well-off fresh yearly highs late in the week.

Last week we postulated that, “Gold is caught in a tug-of-war from a fundamental standpoint. An increase in inflation expectations would typically be supportive but the focus on how this may impact the path for monetary policy continues to outweigh sentiment.” Despite this week’s strong CPI release, price action was a clear indicator that sentiment may have shifted with the U.S. Dollar coming under considerable pressure as traders piled into gold.

That said, the inflationary outlook may reignite demand for the precious metal as a store of wealth and a hedge against capital delusion. Underlying this backdrop are a continued rise in U.S. Treasury yields with the 10-year note testing multi-decade resistance. From a technical standpoint however, gold has carved out a well-defined yearly opening range within the broader uptrend with prices trading just below the range highs into the close of the week.