Fed surprises but is it enough to turn the dollars tide
The Feds were completely unfazed by the soft May CPI report. Mind you the last minute data miss was unlikely to alter their long-term view but none the less we are perhaps witnessing US core CPI becoming the most important data print for traders to key on for the remainder of 2017, even more so than NFP.
The dollar collapsed on the soft CPI data print as dealers viewed three consecutive months of benign core inflation more trend than transitory. The fall in 10-year yield to 2.10 was staggering as was the 100 pip drop on USDJPY as the volatility suggests that the CPI print will be the cornerstone for establishing USD bias for the remainder of 2017.
But it was a case more of two sessions as the Greenbacks morning swoon gave way to an afternoon dollar recovery amidst very hawkish price action.Mind you the bucks recovery should be taken with a grain of salt given the morning CPI induced sell off. The Greenback surprising support came as Feds stuck to their script while adding a couple of shockers by underscoring more balance sheet guidance than the markets expected and downplaying the benign core CPI inflation metrics
While the dollar and US yields have come off overnight lows there remains considerable doubt among investors that the US economy is running hot enough or that inflation will significantly turn the corner to warrant the current FOMC members rate hike expectations.As if in defiance to the markets view an unapologetically hawkish Janet Yellen has left more than a few scratching their heads wondering what actual inflation red light is causing the Feds to tap the stimulus brakes. Their inflation rhetoric was over the top hawkish referencing this year’s run of exceptionally tepid US core inflation prints “ one -off.” The markets are viewing this data more negatively than the Fed which begs the question, are the Fed’s inflation models of crystal balls that much clearer than everyone else’s? Given the market’s glass half full view of the Feds, I suspect traders will have a tough time digesting this overly confident inflation communique from Dr Yellen and will unlikely turn the tide for the beleaguered dollar
However, the real hawkish surprise was offered up in the complete detail regarding balance sheet normalisation. Unexpectedly the Fed has issued an addendum to its ‘Policy Normalization Principles and Plans’ it will allow $6 billion of Treasuries to roll off the balance sheet and increase in steps of $6bn at three-month intervals over 12 months until it reaches $30bn per month. Without question, they delivered way more details than was expected and it’s not such a stretch to assume that the Feds will commence this roll off in September.
But for the beleaguered greenback, the Feds are not the only game in town as the lack of progress on the US economic policy agenda will be an onerous burden for the US dollar through 2017. With more central banks joining the QE taper club, interest rate differentials will likely play less favourably into the dollar hand, so despite short-term dollar reprieves, until the Tump administration gets their economic house in order the dollar could struggle to regain its mantle as king of the hill.
Predictably the biggest mover overnight was JPY. And despite the unexpectedly hawkish FED, USDJPY has failed to recover the overnight loss and is struggling for traction in early trade weighed down by the risk fallout from the latest Trump headlines suggesting that special counsel Mueller is investigating President Trump for possible obstruction. .Equity futures wobbled on the news and given investors sensitivity to all things US political risk we could see some follow through on this headline.But so far in early trade 109.30 USDJPY has held as perhaps investors are all too accustomed to these headlines and are more or less desensitised to Trump noise.
The Euro remains well supported on dips despite the ECB guidance suggesting a status quo on hold approach. Investors remain bullish and appear poised to add on to EUR longs
Focus remains on election fallout while the BOE looks through the higher inflation print as little more than a pass-through function of the weaker pound. Given the political landmines dotting the UK landscape, selling GBP on rallies should offer the greatest risk-reward until further clarity on Brexit negations is forthcoming
The Australian dollar continues to trade constructively as the market lean suggests early year consternation over employment and inflation may be overplayed as the market sits tight just awaiting critical jobs and inflation expectations corroborating the RBA view to look through soft economic prints in Q1