Thursday, August 18, 2016

Dollar Lower: FOMC Minutes vs. Dudley

The dollar index (DXY) is down a third of a percent at 94.41. The weakness in the buck since late July (just under 96.5) has been a headwind to otherwise rational short positioning in oil and grains.
As noted in the headline and intro to another Marc to Market on July 30:
Watching* The Dollar, Key to Commodities This Month
A stronger dollar lowers nominal prices of those commodities priced in dollars and is in fact a big part of our current positioning. So this piece by Brown Brothers Harriman & Co's Head of Global Markets Strategy is a bit troubling, at least in the short run. Longer term you should be able to buy a euro at the 99¢ store but as has been said, the long term is just a series of short terms....
From Marc to Market:

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 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.   
On Monday, sterling posted its lowest close in around 15 years (~$1.2880).  Today it is knocking on its highest level in two weeks just below $1.3180.  A move above there could spur an advance toward $1.3300-$1.3350.  Not only is sterling stronger, but 10-year Gilts are firmer, and the FTSE 250 is up 0.5%, which is the strongest gain this week.  The euro is off 0.75% against sterling to test the GBP0.8580 area.  A break could spur a move toward GBP0.8535 and GBP0.8480....MORE