US dollar wind down on Fed minutes

US dollar wind down on Fed minutes
by Ipek Ozkardeskaya

Released yesterday, Fed minutes wrote ’members said the improvement in labour market conditions met or would soon meet one of the Committee's criteria for beginning policy normalization," but "some indicated that their confidence that inflation would gradually return to the Committee's 2% objective over the medium term had not increased, in large part because recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term."

The Fed have strayed off their well-worn path. The market has lost visibility on Fed’s policy path but the Fed members are not less confused. Unemployment and inflation targets were the foundation of Fed’s policy and these key economic indicators are now diverging from each other. The improvement in unemployment has not led to any acceleration in inflation. The Fed’s ‘data dependency’ is now clearly not restricted to the domestic picture; global macro is now a key tenet to any tightening decision.

The Fed resides at an important junction. The multi-year ZIRP has not given the anticipated result thus the Fed is not in a position to act before a elaborating a more sophisticated road plan. And this situation is keeping the punchbowl on the table.

The dovish Fed minutes sent the US dollar lower against G10 and EM currencies. The US stocks gained in New York; the S&P500 cleared 2000 offers, Dow Jones stepped over 17000 mark. Although a bit steeper, the US yield curve remains subdues on expectation that the Fed will not hike rates this year. The market gives 40% probability for December hike.

Foreign central banks USD holdings decreased by $ 5.154bn, treasuries by $ 4.580bn and agencies by $501mn.

Cable recovered the post-BoE losses rapidly and managed to close the day above its 200-day MA (dovish Fed certainly helped). For a weekly close above 1.5320, the bias should remain on the upside for further advance to 1.5490/1.5500. Having acted as support to post-BoE sell-off, the 1.5250 level (Fib 50% on Apr-Jun rise) could now be considered as a base for further bullish development. Versus the euro, the pound gains some field and further advance to 0.7280/0.7250 could be considered.

AUDUSD bulls gain momentum on the back of dovish Fed minutes and advanced to 0.7300 for the first time since Aug 24. The key level is 0.7380 (Fib 38.2%) below which mid-term traders will continue seeing opportunity in selling the rallies. We shift the support higher to 0.7195 (Fib 23.6%), above which the short-term bullish formation is to stay.

Gold consolidates gains at about its 100-day MA (1142). Dovish Fed and weak US dollar will certainly keep the market above the $1135/40 pivot. Although the momentum is slowing a rebound to $1155 is possible before considering a further advance to $1170/77 (Aug high / 200-day MA). Below 1135/40, we could well retrace to $1122/1112 (Fib 50% / 61.8%).

Dollar Down, Miners Up
by Brenda Kelly

With the dollar basket posting a second week in decline with additional downside likely bolstered by a less-than-hawkish FOMC, the reverse is taking place in the commodity complex. Now, this is hardly earth-shattering news, but it does explain the meteoric rise in the basic resource stocks over the past week or so. Ironically though, very little has changed fundamentally, particularly from a demand perspective and this does tend to argue against the sustainability of the current rally in the FTSE and indeed across all equity indices.

Given that some longer term trends were breached, and breached with conviction over the past number of weeks, there is still a certain scepticism amongst some. Differentiating between a short squeeze and a bull rally will only become clear if this momentum continues and with earnings season underway, we can expect a common theme of ‘strong dollar = weak earnings’’.

European miners are, nevertheless, rising for a 9th consecutive day and the FTSE having started the week at 6129 has now climbed almost 300 points, in the main on the back of these gains.

Glencore, never too far from the headlines is the top performer once again up 6.55% on the day and an astonishing 93% from the lows posted on September 28th. If fortune favours the brave, then there are some fairly intrepid investors out there. The line between foolhardiness and fearlessness is a fine one.

Glencore is slashing its zinc production by a third and job losses are also inevitable as a result. It’s plans to undergo debt restructuring is also aiding investor interest.

Copper prices, which fell yesterday coinciding with the return of Chinese investors to the market from a week off, have risen strongly again today – the reports of supply cuts and disruptions to mines has lent some support. Demand from China has certainly not changed or increased and we would need to see some more upbeat numbers in industrial production and manufacturing for this be the bullish driver.

Silver and gold have also climbed today and this is giving a boost to the likes of Frensillo, Anglo American and Randgold. We’ve been here before for gold and unless we see a clear break above the $1155/oz mark, then the downtrend will persist. The fall in the dollar index may well see additional declines in the near term and this will likely form the catalyst for a move higher in the precious metals space.

Standard Chartered is also rising on the day adding 3%. There has been a global call to reduce staff levels by 25% and a few positions at the managing director level are in peril India as well as in other regions. It’s also deemed unlikely that the bank will be able to cover the $4bn capital gap that UK stress tests are likely to unveil without raising new capital.

USDTRY at critical technical junction
by Ipek Ozkardeskaya

Since the USDTRY broke down the wedge pattern end-September, it has sustainably retraced to 2.9705, the minor Fibonacci 23.6% level from the top of July-September rise, then to 2.9057, the major 38.2% level.

The US dollar lost past 2.90 against the lira as the Fed minutes witnessed nothing else than confusion apropos the timing of the first rate hike. From a technical perspective, the USDTRY is at a critical junction. The pair will step into a bear market for a significant break below the 38.2% retracement level, 2.9050, or rebound aiming fresh all-time highs, through a fresh impulsive rise. The extension signals potential for a rise to 3.15 before 3.30 to the end of the year.

Beyond the technical picture, lira traders should be well aware of rising political risks in Turkey walking into Nov 1st snap election. While the Fed dovishness buys time for Turkey’s central bank, the monetary conditions in Turkey need to be adjusted higher to meet the rising risk premium. Dearth of transparency will likely continue weighing on the lira and give a bearish bias to the future outlook.

Finally, the BIST 100 stocks had an excellent week on the back of lira appreciation. Turkish companies, known to carry significant size of foreign debt in their balance sheets, did take a breather this week. The positive correlation between the lira and the Turkish stocks took the BIST 100 a bit shy of 80000 mark. Should the lira retrace gains against the US dollar from the critical 2.9050 technical mark, the BIST could fall back to 77000/75500 zone (Fib 50% and 38.2% on July-September drop).