Fed Minutes Fail to Help the Dollar

• Fed Minutes Fail to Help the Dollar
• AUD in Play with Key AU and Chinese Data Set for Release
• NZD: Shrugs off Zero Growth in Credit Card Spending
• CAD: Closes in on 3 Month Lows
• GBP: Hits Fresh 1-Month Highs ahead of BoE Rate Decision
• EUR: Rallies for Third Straight Despite Weaker German Trade
• Rise in US Stocks Drive Yen Crosses Higher

Fed Minutes Fail to Help the Dollar

The market's reaction to the March FOMC minutes was completely different from its reaction to the actual Federal Reserve meeting.  Last month when Janet Yellen announced another round of tapering, USD/JPY soared 100 pips but when the FOMC minutes were released today, the dollar dropped to session lows against many major currencies.  While no milestones were reached in USD/JPY, GBP/USD climbed to a fresh 1-month high, USD/CAD closes in on 3 month lows, AUD/USD rose to 4-month highs while NZD/USD reached its strongest level in 2 years.  The minutes were dovish because several Federal Reserve officials felt that the official forecasts exaggerated the pace of tightening.  If you remember, the main reason why the dollar traded higher on March 19th was because Janet Yellen said rates could rise 6 months after QE ends.  There was no mention of this timing in the FOMC minutes but more importantly, not all Federal Reserve officials share her optimistic views.  Considering that Yellen did not volunteer her 6-month timeline until questioned by reporters, there's a very good chance that her views reflect only her personal timing on tightening and not a representation of how the committee feels as a whole. According to the minutes, the committee expects the Fed Funds rate to remain below normal levels for a longer period of time even after employment and inflation reaches targeted levels.  There were also concerns about the decline in credit spreads and the slack in the labor market.  While we don't believe the minutes alter the Fed's course of tapering, it reinforces the notion that the Fed will remove stimulus slowly and cautiously, keeping rates low for an extended period of time.  Unfortunately without any big news on the calendar to shift the current sentiment, the dollar could be vulnerable to further losses. 

AUD in Play with Key AU and Chinese Data Set for Release

The Australian, New Zealand and Canadian dollars hit fresh highs against the greenback today and as mentioned in the dollar portion of our commentary, the gains were largely fueled by U.S. dollar weakness.  However the main driver of AUD and NZD flows will change with tonight's Australian and Chinese economic reports.  In fact, AU Employment and Chinese trade are two of this week's most market moving event risks.  Based on the PMI reports and ANZ job ads, there's a reasonable chance that job growth slowed in the month of February which would not be unusual after the strong January.  Chinese trade numbers on the other hand are expected to improve significantly thanks to an increase in exports and imports.  Economists are looking for a deficit of only -0.95B in March compared to -23B in February. These are lofty forecasts that we fear are vulnerable to a miss that could trigger profit taking in AUD. However if trade improves as much as the experts anticipate and Australia's jobs data beats expectations, AUD could make its way towards 95 cents. The uptick in consumer confidence and home loans overnight boosts the hope for a stronger recovery in Australia's economy in the second quarter.  At the same time weak data has not stopped the comm dollars from rising.  Kiwi is a perfect example - the currency climbed to a fresh 2 year high versus the greenback despite no growth in credit card spending last month.  Aside from Australian and Chinese economic reports, New Zealand house prices and Canadian housing starts are scheduled for release.

GBP: Hits Fresh 1-Month Highs ahead of BoE Rate Decision

The British pound climbed to fresh 1-month high of 1.68 against the U.S. dollar ahead of the Bank of England's monetary policy decision tomorrow. U.K. policymakers are widely expected to leave its asset purchase program and interest rates unchanged until there's a significant move to the up or downside in inflation.  Unlike other central banks, when the BoE leaves policy unchanged, they do not provide any details on the decision, which generally makes it a nonevent for sterling.  Considering that no one expects the BoE to change policy, a steady stance won't have much impact on the currency. Instead sterling will be supported by the recent improvements in U.K. data and the weakness in the dollar.   Today's U.K. trade balance helped to kick off the initial rally in the sterling.  Economists had been looking for a significantly narrower trade deficit and not only did the data meet expectations but manage to exceed it with the trade deficit hitting 9.1 billion pounds in February, up from 9.5 billion the previous month.  Unfortunately the improvement was driven by a simultaneous decline in imports and exports. If the trade deficit does not improve significantly in March, it could be net drag on GDP growth.  However the March trade balance won't be released for another month and in the meantime, the upside momentum in sterling should be strong enough to drive GBP/USD above its February high of 1.6822.

EUR: Rallies for Third Straight Despite Weaker German Trade

The euro extended its gains against the U.S. dollar despite weaker German trade data.  Economists were looking for the country's trade balance to rise from 15B to 17.5B in February but it fell short, rising to only 16.3B.  The current account balance was even worse with a downwardly revised 15.2B surplus in January shrinking to 13.9B in February.  According to our colleague Boris Schlossberg, "Exports declined by -1.3% while imports rose 0.4%. The rise in imports was at the highest level since re-unification indicating that consumer demand remains robust, but the dip in exports must be troubling to European policy makers. The rise in the EUR/USD is clearly having a drag on export demand and with EU authorities unwilling to engage in unconventional measures to bring down the value of the exchange rate it could act as a "brake" on growth as in the words of French government spokesman Le Foll." However without a rebound in the dollar, the euro may not see a significant sell-off.

Rise in US Stocks Drive Yen Crosses Higher

With the rebound in U.S. yields and rise in U.S. stocks, all of the Japanese Yen pairs traded higher.  There were no economic reports released from Japan overnight aside from the central bank's monthly report on the economy.  Their changes were modest.  In the month April, they said, "Japan's economy has continued to recover moderately as a trend, albeit with some fluctuations due to the consumption tax hike."  Back in March, they saw a "front loaded increase in demand prior" to the tax hike.  Although BoJ Governor Kuroda has yet to recognize any negative impact from the tax, the central bank's monthly report suggests that they still anticipate volatility.  The recent sell-off in the Nikkei also can't be ignored. Since last Friday, stocks have fallen 5% and if these losses continue, Kuroda may be forced to tone down this optimism. Machine orders are scheduled for release this evening along with the Ministry of Finance's weekly portfolio flow report.