Dollar Produces Mixed Results Ahead of Fed Minutes

Wednesday February 22: Five things the markets are talking about

With all the ‘hawkish’ rhetoric of late by FOMC members the general concern is that the Fed is caught behind the curve and that catching up likely won’t be friendly to the market.

Currently, U.S bond market yields are showing a little bit of ‘scepticism’ on the growth and inflation story fuelled by high expectation over Trump’s fiscal policy – both the Dow and S&P 500 continue their record-setting rises, but the 10-year Treasury yield is straddling atop of the +2.3%-2.6% range.

With much of the market trying to position for higher yields, any evidence of disappointment from Trumponomics could generate a massive paring back of the current short U.S debt positions and drag yields even lower.

Later today, the Fed releases the minutes from its most recent meeting (02:00pm EST), possibly giving investors a look into how members see Trump’s policies.

Note: Fed’s Harker (hawk, voter) reiterated view that ‘three’ rate hikes would be appropriate this year and would not take a March rate move off the table. The Fed’s Mester (hawkish, non-voter) is also comfortable with interest rates going higher.

Other U.S data this morning should show the domestic housing market (10:00am EST) picking up in Q1.

1. Global equities again hit record levels

U.S. stocks hit record intraday highs yesterday as strong earnings from top retailers underscored the strength of the U.S. economy.

In Japan, the Nikkei (-0.1%) share average was little changed overnight, unable to extend a two-day winning run as the yen’s retreat outright (¥113.04) capped the broader market. The broader Topix rallied +0.1%.

In Hong Kong, stocks are trading atop their 18-month highs, led by resource and property stocks, as sentiment was lifted by the city’s firmer economic growth outlook and stronger China inflows. The Hang Seng index ended up +1.0%, the highest since Aug. 2015.

In China, its main share indexes rallied for a third consecutive day to approach their three-month highs. The blue-chip CSI300 index rose +0.2%, while the Shanghai Composite Index also added +0.2%.

In Europe, equity indices are trading generally positive, but mixed after German IFO came in better than consensus. Pharmaceuticals are the notable laggard in the Eurostoxx while financials are leading the gains in the FTSE 100. Commodity and mining stocks are trading sharply lower in the index.

U.S stocks are set to open little changed (+0.0%).

Indices: Stoxx50 +0.1% at 3,341, FTSE +0.3% at 7,295, DAX +0.2% at 11,992, CAC-40 +0.4% at 4,907, IBEX-35 -0.1% at 9,550, FTSE MIB -0.4% at 18,962, SMI -0.1% at 8,560, S&P 500 Futures flat

2. Oil prices under pressure, gold range bound

Global oil prices slipped overnight as the “mighty” dollar found support. Nevertheless, crude prices remain broadly confined atop of their multi-week highs after OPEC again signaled yesterday their optimism over its deal with other producers to curb output.

Brent crude is down -44c, or -0.8% at +$56.83, having touched its highest since Feb. 2 at +$56.20 yesterday. U.S light crude (WTI) is down -34c or -0.6% at +$53.99 a barrel.

Note: OPEC confirmed yesterday that January data showed conformity from member countries in the output cut at above +90%.

Also adding to the bullish sentiment, hedge funds have raised their combined net “long” position in the three main derivative contracts linked to Brent and WTI by +51m barrels last week.

Both gold and silver broke recent lows overnight, triggering some stop loss selling action as the ‘big’ dollar strengthened broadly ahead of this afternoons FOMC minutes. However, both precious metals have rebounded strongly ahead of the U.S open to finish roughly unchanged at +$1,236 and +$17.95 an ounce respectively.

3. Sovereign yields out of sync on geo-political concerns

A muddy outlook on French election continues to drive investors to cut exposure to French government debt and embrace German bunds and U.S Treasuries.

The latest polls show right-wing presidential candidate Le Pen extending her lead in the first-round of voting.

Note: The odds of winning the second round are less likely, but any news that clouds the election outlook will lead investors to cut exposure.

Earlier this morning, Germany’s two-year Schatz yield fell to a new record low of -0.91% as investors’ run for safety continues. The 10-year Bund yield is trading at +0.27%, down from +0.31% yesterday. The drop in short-end German bund yields is weighing on the EUR, pushing it to multi-week lows against the dollar (€1.0502) and the yen (€118.69).

Elsewhere, it’s the third time in less than six months that Australia has set a new borrowing record by issuing a +AUD$11B of 11-year debt notes in its biggest-ever bond transaction.

Note: Investors remain hungry for higher yields, despite concerns over Aussie budget deficits.

4. Dollar produces mixed results ahead of Fed Minutes

The ‘mighty’ dollar trades mixed against G7 currencies with rate differentials remaining the primary price driver. Both investors and dealers wait for the Fed’s February minutes for more insight on looming rate hikes.

The EUR (€1.0506) has again failed to respond to better Euro data for the second consecutive session – German Feb IFO Survey and Eurozone CPI beat expectations. In the U.K, the pound trades under pressure (£1.2440) as mixed Q4 GDP data (see below) weighs on the currency. Sterling rallied initially as figures showed U.K. Q4 GDP was revised up to +0.7% q/q from +0.6%, but then fell as traders reacted to a -1% fall in business investment during the quarter, a possible sign that firms may be growing more cautious due to Brexit uncertainty.

USD/JPY (¥113.05) is softer in the wake of the BoJ’s Governor Kuroda’s comments overnight that oil prices had likely stopped weighing on CPI which dealers took as a potentially diminishing the need for bolder easing from the central bank.

5. UK Q4 growth revised up

The U.K. economy finished 2016 on a stronger footing than previously thought, with buoyant consumer spending and exports offsetting a slide in business investment.

Data this morning showed that growth on the quarter was revised up, to +0.7%, an annualized rate of +2.9%. However, growth over the year as a whole, though, was trimmed to +1.8% from +2%, reflecting a weaker performance in Q1 than previously calculated.

Note: The consensus expects the U.K. to slow this year as quickening inflation squeezes consumer spending.

Other data this morning reveals that the German economy may be back on track with the German Feb IFO Survey beating expectations as the Business Climate matches its high from Feb 2014 (111.0).

Also, the Eurozone January Final CPI reading confirmed that the annual pace hits its highest level since Feb 2013 with the core again hitting the upper range – +0.9%.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell