The FOMC Minutes from the June policy meeting confirmed that the Fed is indeed taking steps toward cutting its bond-buying program in 2021. Even though most of the participants believed that the risks to their inflation projections were tilted to the upside and even though they expected the economic conditions to justify the reduction of asset purchases sooner than they had previously anticipated, the release of the minutes didn’t have a major impact on the currencies. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The USD Index (.DXA) has at the time of writing this moved only 0.06% from the levels prior to the release. Risk sensitive commodity currencies reacted the most with NZD (-0.61%) leading AUD (-0.55%) and CAD (-0.43%) on the way to the downside. Commodity prices are sensitive to changes in the US monetary policy as a stronger dollar tends to have a negative impact on these dollar-denominated markets. This weakness suggests that even though the yields are currently edging lower the markets are worried about higher yields later in the year when the Fed starts to taper. The expectation is that the Fed will announce the tapering measures next month. The combination of lowering yields and the apparent risk-off sentiment (as reflected in the commodity currencies) weakened USDJPY after the minutes were released and the pair traded through our support zone. JPY is, at the time of writing this, up by 0.30% against the USD (as measured from the release of the minutes).
The S&P 500 (+0.34%) and the Dow Jones Industrial Average (+0.30%) indices gained a little in yesterday’s trading but the Nasdaq Composite index (+0.01%) closed almost unchanged. When measured from the time of the release of the Minutes, all the equity index futures are down between 0.21% and 0.33%. The impact on commodities has been similar. Again, measuring from the time of the release of the minutes gold (-0.32%), silver (-0.57%) and WTI crude (-0.17%) futures are sustaining some losses. There were no substantial reactions to the minutes in the main cryptocurrencies. What’s noteworthy in these markets is the lack of buying interest as BTCUSD, ETHUSD and LTCUSD are all trading sideways in a drowsy manner. The main risk events today are the US unemployment claims and the US crude oil inventories.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has now changed the tune and is moving away from the ultra-accommodative monetary policy. Currently, the expectation is that the first-rate hike would take place in the second quarter of 2022.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration is negotiating with the Senate Republicans to introduce a $1.2 trillion infrastructure stimulus plan.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways since March. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||Even though the June NFP report came in better than anticipated (+850K) the total is still 6.8 million jobs lower than at its peak in February last year. However, the Fed has said earlier recently that believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.|
|Inflation||The year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m)|
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Market News & Facts
- ECB inflation target to 2%
- PBOC $23 billion intervention to buy USD against yuan
- The US JOLTS job openings for June 9.209M (9.310M expected)
- Japan’s extra stimulus estimated at $180 bn
- Westpac forecasts RBNZ will hike rates in November
- US ISM Services PMI for June 60.1 (63.5 expected)
- UK construction PMI for June: 66.3 (64.2 previous)
- PBOC: warns against institutions providing cryptocurrency services
- RBA’s Lowe is not considering rate increases in 2023
- The UK Prime Minister lifts Covid restrictions
- OPEC+ meeting postponed
- Central banks reportedly buying gold, moving out of the USD
- China June Caixin/Markit Services PMI 50.3 (55.7 expected)
- ANZ Australian Job Ads for June +3.0% m/m
- Australia to limit international arrivals by 50% due to the Delta strain
- Philadelphia Fed’s Harker: tapering should start later this year
- BOE ready to respond to signs of persistent inflation
The Next Main Risk Events
- USD – Unemployment Claims
- USOIL – Crude inventories
- EUR – ECB Presiden Lagarde’s Speech
- GBP – BOE Governor Bailey’s Speech
- USOIL – OPEC JMMC Meetings
- CAD – Employment Change
- CAD – Unemployment Rate
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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