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Divided We Fall

by Stephen Casey | August 18, 2016

Good morning. The US dollar has touched a seven-week-low in the wake of yesterday’s Fed meeting minutes release. A divided Federal Reserve committee has pushed the greenback lower over the last day or so as investors around the world push out the next rate hike (more analysis below). Elsewhere in markets, most stocks continue to rise as the old adage “no news is good news” rings true for traders seeking actual return. Good news out of Australia and Great Britain pushed their respective currencies overnight as North America is poised for another quiet open.

Australian employment figures kicked things off on Thursday – showing a huge 26.2k increase in jobs for the month of July. Driven by part-time roles, the Aussie surged higher on the result, coupled with an increase in the participation rate and a nice dip in the headline unemployment rate. Unfortunately, those gains were short-lived as oil prices dipped, spearheaded by Brent crude which could not hold the crucial $50-per-barrel mark. Likewise, the New Zealand dollar fell, dragged lower with other risky currencies as some investors took profit. The Nikkei, one of the weakest performers, touched a two-week low pushing up the safe-haven yen which found a lot of support in the cross-community. Notable crosses such as NZD/JPY and GBP/JPY fell hard again, becoming popular trades of late. Speaking of the UK, strong retail sales did provide for some relief for sterling, which jumped more than 100 points on Thursday. Despite the Brexit outcome, shoppers in the UK did go on living in July, as retailers showed a very robust 1.4% gain over the previous month. The euro saw similar gains as construction output and consumer prices for the euro-area bested the market’s expectations. The EUR/USD rate has closed above strong technical resistance levels for two consecutive days now and has some wondering if higher levels are in the cards.

It is Thursday which means weekly jobless claims are on the docket here in the US. This morning, Wall Street reported that 262k Americans filed first-time unemployment claims for the week ending August 12th. It is another strong employment number for the US, one sector which has consistently performed well during an otherwise pathetic recovery. Speaking of pathetic recoveries, the FOMC minutes from July’s meeting hit the wires on Wednesday. Yesterday afternoon, markets got a good look inside the July meeting, which showed policymakers in the US remain divided on where to go with rates. The immediate reaction for the dollar was lower despite what really could be construed as a more  neutral/hawkish tone from the minutes. Some committee members remain concerned over the Brexit fallout and performance of the American economy, while a faction expressed optimism over both, even pushing for higher rates sooner than later. On inflation, policymakers “suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated,” leaving a lot of interpretation on wages for this month’s employment report. Chairman Yellen will be speaking next on August 26th at the annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming. Right now, the market gives a 12% chance for a hike in September, a 15% chance for November and a 48% chance for December.

The Canadian dollar was one of the immediate benefactors following yesterday’s FOMC minutes release. The Loonie continues to grind higher, now on two-month highs, taking advantage of the weaker greenback. On Wednesday, the US Energy Information Administration reported a drop in crude oil stocks for the week ending August 12th – the first such drop in almost a month. As a result, oil prices charged higher again, getting as high as $47-per-barrel. While we noted this week, the correlation between oil and the Canadian dollar has reached a medium term low, the correlation isn’t dead and oil remains a strong short-term indicator. Tomorrow, July inflation is reported, no change over the previous month is expected.

 

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