Slow Lift Off Hurts Dollar

FOMC Minutes: “Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting” (December 15-16).

Minutes gave investors little incentive to add to their long dollar positions: The USD has been under the defensive, falling across the board, ever since the released minutes yesterday. Dealers and investors have been recalibrating the pace of the Fed’s rate normalization policy. The takeaway from yesterday is that December’s meeting would be the likely occasion for the liftoff, but any tightening campaign would be very “gradual”. Aside from a misfiring dollar, global equities have been given a boost, while U.S treasury yields are little changed.

No surprises from Kuroda: With Japan slipping into a technical recession earlier this week, they was an outside chance that the Bank of Japan (BoJ) would surprise investors at last nights monetary policy meeting. However, that was not to be the case. The BoJ has maintained its annual pace of monetary base expansion at 80 trillion Yen and has also kept its overall economic assessment unchanged, while suggesting that their domestic economy continues to recover moderately. The only change that Governor Kuroda and company have made is on inflation front, reiterating that the year-over-year rate of increase in inflation (CPI) is about +0% and that inflation expectations are to rise from a longer-term perspective. Nonetheless, for now various indicators continue to show weak developments with energy prices considered the main culprit. Earlier, Japan’s trade balance was better than expected on the headline, but digging deeper, the numbers revealed exports falling for the first time in 14-months and imports declining much more than expected (–13.4% vs. –8.6%e). The breakdown indicates that shipments to Asia and China were both down over -3.5%, while exports to U.S and Europe up over +5%. The BoJ’s inaction has encouraged a broader range of investors to pare/cut their long dollar positions, thereby pushing the dollar towards the psychological ¥123.00 handle.

UK retail sales hold onto most of its September gain: U.K retail spending fell slightly in October, pressured by a dip in food sales (hangover from the Rugby World Cup). October retail sales (ex-gas) fell by a monthly –0.6% vs. an expectation for a +0.1% rise. Year-over-year, October sales were +3.8% higher vs. expectations for a +4.9% increase. Recent sales figures have been volatile; nevertheless, the market will be interpreting the headline print as a positive sign for underlying retail spending. Aiding future retail sales – U.K wages are rising, the BoE recognizing subdued inflation, and the U.K consumer continues to remain confident.

Central Banks hesitant to react ahead of Fed: That has definitely been the dominant theme from Tier 1 & 11 central banks in the latter half of this year. The possibility of the Fed hiking in December has helped weaken yen and other G7 currencies towards some key dollar resistance levels this month. The event risk between now and December 16 would be the possibility that the Fed finds a reason to do nothing (possibility of a November payroll revision). Currently, the market has already priced in the Fed’s first “token” rate hike, and if Yellen and company happen to disappoint then these weak “long” dollar positions accumulated over the past month will be quickly punished.

Low inflation expectations will not pressure RBA to act: Fixed income dealers are slowly adjusting their Aussie yield curves. Low inflation numbers have certainly give the Reserve Bank of Australia (RBA) ammo to cut rates again, however, the recent lift in business conditions and last weeks stellar jobs report is keeping Governor Stevens on hold for the moment. The market will now be looking to January’s CPI data for a reason for the RBA to cut rates again to keep inflation on target. Like other central banks, the RBA is expecting the Fed to do most of the heavy lifting in the short-term. To date, G7 bankers have done a good job talking their own currencies down. Expect global policy makers to react much more quickly in H1 if the Fed’s first token move happens to have a material negative impact (appreciate against the dollar) on their own currencies.

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