Preparation for Fed Exit

Forex News and Events:

USD demand continues to dominate FX trading as hawkish Fed Minutes, weak Chinese and European data creates enough reason for migration into the greenback. In the European session, Euro-area PMI string was broadly weaker. Yet due to ongoing sanctions on Russia, there was expectations of a softer print. EU flash PMI composite printed 52.8 vs. 53.4 exp and 53.8 prior read. This weakness clearly indicates further deterioration in Europe’s economic condition. Ongoing erosion in data will fuel further speculation of ECB stimulus (although effectiveness is highly debatable) and increase importance on ECB President Draghi’s comments from Jackson Hole tomorrow. In the last two days, the BoE and the Fed both provided more hawkish minutes than the market had been anticipating.

Fed Minutes ‘hawkish’

As was hyped, the Fed minutes provided some interesting developments. In a nutshell, the Fed Minutes were considerably more hawkish then the market was positioned for. The FOMC members agreed that conditions in the labor markets had improved significantly (outpacing dovish expectations) and was now closer to a normalized long-term level. It was also noted that long-term inflation was running closer to 2%. Some members were said to be ‘increasingly uncomfortable with the Committees forward guidance’. And perhaps most eye catching was the comment that details for the Feds exit strategy will occur “before most participants anticipate the first steps in reducing policy accommodation to become appropriate. ” US rate curve and USD have reacted to the expectations of normalization. Clearly these hawkish minutes suggest that the Fed is now in preperation for an exit. These candid minutes sets up a compelling speech by Fed Chair Yellen tomorrow at Jackson Hole (symposium starts today). We has anticipated the Fed had overestimated the perceived “slack” in the US labor markets and suspect that members will move to tightening policy rates earlier then expected (as now reinforced by minutes). We remain constructive on USD and GBP on the back of policy divergence.

7-2 Vote

The BoE MPC voted to keep monetary policy unchanged at its August meeting, with the Bank Rate steady at 0.50% and asset purchases at £375bn. However, there was dissension in the ranks as Ian McCafferty and Martin Weale voted against the hold proposal, voting instead for a hike of 25bp (7-2 vote). While there had been extensive discussions over the account of spare capacity, specifically in the labor market, this was the first time the vote was not unanimous. We had anticipated a split (see daily newsletter) but as for any chance of November tightening, member hawkishness (votes verse words) would have to start now. The committee now has a wide range of views but as indicated in last week's inflation report, there is a consensus that the degree of “slack” has decreased. The dovish and dominant side of the argument still hinges on the fact that while decent economic growth is evident, there is still not enough inflationary pressure to warrant a hike. In addition, a preemptive hike could damage the recovery which is navigating some unprecedented international challenges. The two dissenters logic is that unemployment will continue to fall and given the lag in wages growth, further tightening labor market could generate a suddenly kick in inflationary pressures. We are pushing back our view to the December meeting which will allow members to first view the Inflation Report. That said, in the coming months other members will join the dissenters argument which in turn should keep GBP supported.

Today's Key Issues (time in GMT):

2014-08-21T00:00:00 AUD Jun Conf. Board Leading Index MoM, last 0.20%
2014-08-21T01:00:00 NZD Aug ANZ Consumer Confidence Index, last 132.7
2014-08-21T01:00:00 NZD Aug ANZ Consumer Confidence MoM, last 0.60%
2014-08-21T01:30:00 AUD Jul RBA FX Transactions Market, last 1271M
2014-08-21T01:30:00 AUD Jul RBA FX Transactions Government, last -1293M
2014-08-21T01:30:00 AUD Jul RBA FX Transactions Other, last 39M
2014-08-21T01:35:00 JPY Aug P Markit/JMMA Japan Manufacturing PMI, exp 51.5, last 50.5
2014-08-21T03:00:00 NZD Jul Credit Card Spending MoM, last 0.70%
2014-08-21T03:00:00 NZD Jul Credit Card Spending YoY, last 7.00%, rev 6.00%
2014-08-21T05:00:00 JPY Jul Supermarket Sales YoY, last -2.80%
2014-08-21T06:00:00 CHF Jul Trade Balance, exp 1.85B, last 1.38B, rev 1.41B
2014-08-21T06:00:00 CHF Jul Exports Real MoM, last 5.60%, rev 6.00%
2014-08-21T06:00:00 CHF Jul Imports Real MoM, last 10.80%
2014-08-21T07:00:00 DKK Aug Consumer Confidence Indicator, exp 8, last 10.6
2014-08-21T07:00:00 CHF Jul Money Supply M3 YoY, last 4.00%, rev 4.10%
2014-08-21T07:00:00 DKK Jul Retail Sales MoM, exp 0.40%, last -0.60%, rev -0.80%
2014-08-21T07:00:00 DKK Jul Retail Sales YoY, last -0.80%
2014-08-21T07:30:00 SEK Jul Unemployment Rate, exp 7.40%, last 9.20%
2014-08-21T07:30:00 SEK Jul Unemployment Rate Trend, last 8.00%
2014-08-21T07:30:00 SEK Jul Unemployment Rate SA, exp 7.90%, last 8.00%
2014-08-21T07:30:00 SEK 2Q Total No. of Employees YoY, last 1.40%
2014-08-21T08:00:00 NOK 2Q GDP QoQ, exp 0.50%, last 0.30%
2014-08-21T08:00:00 NOK 2Q GDP Mainland QoQ, exp 0.60%, last 0.50%
2014-08-21T08:00:00 EUR Aug P Markit Eurozone Manufacturing PMI, exp 51.3, last 51.8
2014-08-21T08:00:00 EUR Aug P Markit Eurozone Services PMI, exp 53.7, last 54.2
2014-08-21T08:00:00 EUR Aug P Markit Eurozone Composite PMI, exp 53.4, last 53.8
2014-08-21T08:30:00 GBP Jul Retail Sales Ex Auto MoM, exp 0.40%, last -0.10%
2014-08-21T08:30:00 GBP Jul Retail Sales Ex Auto YoY, exp 3.50%, last 4.00%
2014-08-21T08:30:00 GBP Jul Retail Sales Incl. Auto MoM, exp 0.40%, last 0.10%
2014-08-21T08:30:00 GBP Jul Retail Sales Incl. Auto YoY, exp 3.10%, last 3.60%
2014-08-21T08:30:00 GBP Jul Public Finances (PSNCR), last 11.8B
2014-08-21T08:30:00 GBP Jul Central Government NCR, last 18.1B
2014-08-21T08:30:00 GBP Jul Public Sector Net Borrowing, exp -1.7B, last 9.5B
2014-08-21T08:30:00 GBP Jul PSNB ex Interventions, exp -1.5B, last 11.4B
2014-08-21T08:30:00 GBP Jul PSNB ex Royal Mail, APF, exp 0.8B, last 11.4B
2014-08-21T09:00:00 SEK Bloomberg Aug. Sweden Economic Survey
2014-08-21T09:05:00 NOK Bloomberg Aug. Norway Economic Survey
2014-08-21T09:10:00 DKK Bloomberg Aug. Denmark Economic Survey
2014-08-21T12:30:00 USD 16.août Initial Jobless Claims, exp 303K, last 311K
2014-08-21T12:30:00 USD 09.août Continuing Claims, exp 2520K, last 2544K
2014-08-21T13:45:00 USD Aug P Markit US Manufacturing PMI, exp 55.7, last 55.8
2014-08-21T13:45:00 USD 17.août Bloomberg Consumer Comfort, last 36.8
2014-08-21T13:45:00 USD Aug Bloomberg Economic Expectations, last 46
2014-08-21T14:00:00 USD Aug Philadelphia Fed Business Outlook, exp 19.7, last 23.9
2014-08-21T14:00:00 USD Jul Existing Home Sales, exp 5.02M, last 5.04M
2014-08-21T14:00:00 USD Jul Existing Home Sales MoM, exp -0.50%, last 2.60%
2014-08-21T14:00:00 EUR Aug A Consumer Confidence, exp -9.1, last -8.4

The Risk Today:

EURUSD EUR/USD continues to decline as can be seen by the break of the strong support at 1.3296. The short-term technical structure is negative as long as prices remain below the hourly resistance at 1.3336 (12/08/2014 low). An initial resistance can be found at 1.3297 (intraday high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. A downside risk is given by 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A key support now stands at 1.3105 (06/09/2013 low), whereas a key resistance lies at 1.3444 (28/07/2014 high).

GBPUSD GBP/USD made an intraday bearish reversal yesterday, confirming persistent selling pressures. The short-term technical structure is negative as long as prices remain below the resistance at 1.6739 (see also the declining trendline). An initial resistance lies at 1.6679. A support can be found at 1.6556. In the longer term, the break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) invalidates the positive outlook caused by the previous 4-year highs. However, the lack of medium-term bearish reversal pattern and the short-term oversold conditions do not call for an outright bearish view. A key support now stands at 1.6460 (24/03/2014 low).

USDJPY USD/JPY continues to rise and is now close to the key resistance at 104.13. Hourly supports can be found at 103.20 (intraday low) and 102.91 (intraday low). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high). We have removed our long strategy.

USDCHF USD/CHF has broken the resistance at 0.9115 (06/08/2014 high) and is now close to the strong resistance at 0.9156 (see also the 38.2% retracement). Hourly supports can be found at 0.9106 (intraday low) and 0.9088 (intraday low). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. Monitor the test of the strong resistance at 0.9156 (21/01/2014 high).

Resistance and Support: