FX Daily, August 18: US Dollar Pushed Lower, but Do FOMC Minutes Really Trump Dudley?

Swiss Franc

A bad day for the dollar means a good day for CHF, that appreciates against both euro and dollar.

FX Rates

It is not a good day for the US dollar. It is being sold across the board. The seemingly dovish FOMC minutes released late yesterday appears to have gotten the ball rolling. The takeaway for many was that any officials wanted more time to assess the data at the July meeting.

The question is whether two months more data is sufficient. The market did not have much confidence (less than one in four) chance of a hike in September. Dudley, like other Fed officials, have indicated that a hike in September was possible. This is the meaning of the Fed’s data dependency;  meetings are live. The FOMC minutes make it seem that the bar to a move in September is high, but Dudley’s comments about the market’s complacency is not just about next month’s meeting. It is also about the December meeting.

The Aussie bounced a little above $0.7720 but stopped shy of the week’s high near $0.7750, which is also just below last week’s high. Provided it holds above $0.7680, it may make another run at the highs in North America.

The euro made a marginal new high near $1.1330, which is the highest level since the UK referendum. We have suggested a $1.1350 target, but the technical evidence warns that this may be overshot. Above thee, we suggest potential toward the $1.1425-$1.1450 area.

United Kingdom

The dollar bears are pushing through an open door. The greenback was technically week and the FOMC minutes gave little reason to resist.The strongest major currency today is sterling. Following yesterday’s stronger than expected employment data, today the UK reported a robust retail sales report for July. The median guesstimate in the post-referendum environment, which had already seen soft BRC sales figures, was for a 0.9% decline in UK retail sales.

Instead, they jumped 1.5% excluding petrol and 1.4% with it. It is the strongest report in five months. It appears hot weather boosted demand for clothing and footwear, while tourists, drawn by sterling’s weakness scooped up watches and jewelry. If one did not know of Brexit, the combination of low interest rates, low inflation/prices, and robust jobs market would seem rather impressive.

Japan

Due to seasonal considerations, Japan’s July trade balance typically deteriorates from June. This pattern held, but Japan still reported a larger than expected trade surplus of JPY513.5 bln (Bloomberg median was JPY273.2 bln).  However, the details were troubling.

Eurozone

Eurozone data was uninspiring. The June seasonally adjusted current account surplus narrowed to 28.1 bln euros from 31.8 bln. Construction output in June was flat, and May’s 0.5% decline was revised to flat. The Q2 data is too dated to be of much significance for traders now. The July CPI fell 0.6% not 0.5% as initially reported, but the year-over-year pace was unchanged at 02% from the preliminary estimate.

United States

The US economic calendar is light with weekly jobless claims and the August Philly Fed survey featured. The real highlight may be Dudley’s press conference, and Q&A around 10 am ET. We do not expect Dudley to back away from his comments made a couple of day ago. In our work, we tend to give more credence to Dudley comments, and the Fed’s leadership more broadly, than the FOMC minutes, which we think dilutes the signal with a cacophony of voices. Yellen speaks at Jackson Hole at the end of next week. Our guess is that she is closer to Dudley’s assessment than a dovish read of the minutes would suggest.