FX Update: USD rebounds on tone deaf FOMC minutes

Trading interest

• Maintaining long AUDNZD with stops below 1.0470 now for 1.0625 and eventually 1.0700
• Staying short EURJPY for 112.00 as long as remains below 119.50
• Long USDCAD for 1.3500+ with stops below 1.3240

The FOMC minutes provided little sense that the Fed either a) has no strong sense of what it will do next and really is simply pouring over the economic data points and especially lagging indicators to make its next policy decisions  or b) doesn’t want to talk about the fiscal drivers (massive US deficits) that are preordaining its policy future due to political or “market confidence” reasons. Either way, this offers little confidence that Fed Chair Powell is set to deliver a strongly dovish message tomorrow at the Kansas City Fed’s Jackson Hole, Wyoming symposium that will bring the Fed back ahead of the curve.

While some discussion of the minutes in the press have focused on the dovish portions of the minutes’ “Review of Monetary Policy Strategy, Tools and Communication Practices” and noted that the Fed  is set to act more “confidently and pre-emptively in using these tools [forward guidance, QE, etc..] in the future if economic circumstances  warranted”, there is little to suggest in the rest of the document that the Fed sees any clear and present danger to the economy that “warrants” the triggering of these tools, nor the recognition of the fiscal pressuring I note above. Hence, Powell will really need to switch gears in his speech tomorrow at Jackson Hole to prevent a further USD spike from here.

The portion of the minutes positioning the FOMC participants outlook is perhaps the most telling paragraph in the monumentally boring minutes:

“In their discussion of the outlook for monetary policy beyond this meeting, participants generally favored an approach in which policy would be guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course. Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months. A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook. “

This is why the yield curve flattened afresh after the minutes as it feels the Fed remains behind the curve. “Mid-cycle adjustment” will go down as the Powell Fed’s “peace in our time” moment.

Today’s ECB minutes may provide indications on the mix of tools that the ECB is mulling at its September 12 meeting – Draghi’s penultimate meeting before his October 24 swan song as ECB president. But the market will prove far more reactive to the latest EU signaling on its fiscal (and more urgently, bank recapitalization…) plans, as the ECB toolkit is seen as largely exhausted.

Germany saw a failed auction of 30-year zero-coupon bonds yesterday, only unloading EUR 824 million of the 2 billion it hoped to sell. This is a strong sign that long yields in Europe, at least, have reached rock bottom. That is not necessarily euro supportive, because unattractive yields across Europe suggest that global investors will give the EU bond market a wide berth.

Chart: EURJPY
We have looked for further downside in EURJPY to little avail recently as there has been a general momentum pause in virtually all of the JPY crosses. In the wake of today’s ECB minutes and EU flash PMI’s for August and tomorrow’s pivotal speech from Fed Chair Powell, it is likely time for the JPY rally to either re-engage or face a squeeze. The euro looks particularly heavy here and remains a compelling way to avoid the USD in expressing JPY strength.