Why FOMC Did Not Hurt the Dollar

• Why FOMC Did Not Hurt the Dollar
• Euro Dips, Latest on Greek Debt Talks
• GBP Pops on Mortgage Approvals
• USD/CAD Dips Below 1.29
• NZD: RBNZ Wheeler Says Further Easing Seems Likely
• AUD: Shrugs Off Late Day Recovery in Chinese Stocks

 Why FOMC Did Not Hurt the Dollar

Most analysts will agree that today's FOMC statement was less hawkish than they anticipated.  Everyone was hoping that the Federal Reserve would make adjustments to prepare the market for September tightening. However instead of doing so, they wanted to see "some further" job market improvement before raising interest rates.  When this line hit the newswires, the U.S. dollar sold off against all of the major currencies. However the losses were short lived as investors scooped up dollars on the notion that September tightening remains on the table.  The Fed said they wanted to see additional improvement in the labor market and with 2 non-farm payrolls report scheduled for release before the September meeting, the central bank could still have the evidence they require to raise rates.  Furthermore, their outlook for the economy remains positive with the labor market continuing to improve, solid job gains noted and diminished labor market slack. As this was the shortest FOMC statement in nearly 3 years the central bank is clearly still divided on the timing for liftoff.  Today's decision to hold rates steady was unanimous but the September decision will be a close call. The lack of clarity from today's FOMC rate decision makes tomorrow's Q2 GDP report even more important.  Strong numbers will be needed to reinforce the dollar rally and take USD/JPY above 124.50.

Euro Dips, Latest on Greek Debt Talks

The euro continued to reject the 50-day SMA, falling below the psychologically significant 1.10 mark. No major Eurozone economic reports were released on Wednesday but that changes tomorrow with Germany's unemployment and consumer price reports scheduled for release along with the Eurozone's confidence report. The only numbers released were German and French consumer confidence. In Germany, confidence held steady in August and in France it fell slightly in July. Greece continues to be a primary focus and while the EU says "intense work" is progressing in Athens, the main point of contention - debt relief remains an open question.  The IMF argues that significant debt relief is needed and PM Tsipras believes they will have it by November and even warned that if he does not have enough support within the government, early elections may need to be held. According to IMF Chief Christine Lagarde, a four-legged solution is needed for Greece.  This includes #1 sensible fiscal targets #2 structural measures to open up the Greek economy #3 sufficient financing to make the program workable and #4 debt restructuring. She does not see a workable solution without some form of debt relief and we agree as well.  Less than 2 weeks ago, German Chancellor Angela Merkel said she is prepared to consider debt relief (not write down) but only after creditors agree on the details of the bailout.  So we are slowly edging in that direction and if further progress is made, it could engineer another short squeeze in the euro. In the meantime, traders will be watching the German unemployment report and US Q2 GDP reports for guidance on where to take EUR/USD next.

GBP Supported by Mortgage Approvals

After Wednesday's healthy GDP report, sterling received another boost from this morning's housing market data. Mortgage approvals rose more than expected and net consumer credit ticked higher, reinforcing our positive outlook for the pound.  While we believe that the Bank of England won't raise rates until 2016, the fact that they will be the second in line to hike and one of the few major central banks with a tightening bias, the underperformance that we saw last week should turn into outperformance in the weeks to follow. We expect further gains in the pound versus currencies of countries with an easing bias such as Canada, New Zealand, Australian and the Eurozone. This week has been all about the U.S. dollar but the focus will return to the pound next week with service, manufacturing and construction sector PMIs scheduled for release.  If activity accelerates, sterling could find enough momentum for a move to 1.58.

USD/CAD Dips Below 1.29

With oil prices rising 1.4%, USD/CAD dipped below 1.29 for the first time in 10 trading days. It ended the day above this level following FOMC, but the uptrend for the currency pair is beginning to lose momentum.  The price of oil is extremely important to Canada and these days it appears that the currency is moving pip to pip with the commodity.  Unless we see a major turnaround in oil prices from however, the previous decline will take its toll on the economy.  Incoming economic reports will show underlying weakness that could limit the recovery in the currency. As such the 1.27 to 1.28 region could be an attractive place to buy USD/CAD. The Australian and New Zealand dollars on the other hand weakened despite the rebound in Chinese equities. The Shanghai Composite Index rose 3.4% overnight after experiencing its largest one day decline in 8 years on Monday. It is rumored that the government stepped in and bought as volume remained low and stocks remained under pressure until the last hour of trading. After initially trading higher on the back of RBNZ Governor Wheeler's comments, NZD erased all of those gains to end the day in negative territory. Wheeler said several factors are supporting economic growth and their aim is to return inflation to 2% in 9 to 12 moths time, but further easing seems likely and more substantial NZD depreciation is necessary.  So in a nutshell, RBNZ policy remains accommodative and since Wheeler is looking for a weaker currency, we will be looking for further losses as well.