Dollar: Big Takeaway from Fed is NOT in the FOMC Minutes

The focus was on the FOMC minutes today but the big takeaway message from the Fed was not contained in the details of a meeting held 3 weeks ago. Instead the most valuable guidance we received from the central bank came from the comments from U.S. policymakers. We have been waiting patiently to see if the Fed's views have changed since the Paris attacks and based on the speeches from 5 Fed Presidents (3 of whom are FOMC voters), there's still a lot of eagerness within the ranks to raise interest rates next month. It seems that policymakers are not worried that the slowdown in Europe will spill over to the U.S. in a big way but a better way to look at this is that the Fed still feels the process of unwinding emergency stimulus needs to begin.

FOMC voter Lockhart who said, he's "confident Fed is ready for normalization phase and the economy can handle a 25bp move," made the most hawkish comments. He believes that the U.S. economy is on a solid path and the liftoff criteria of the job market have been met. FOMC voter Lacker also sees substantial improvement in the labor market and believes the case for a Fed rate increase is strong. In fact he even warned that the chance of the Fed falling behind the curve is rising. Of course it is important to add that Lacker dissented in September and October. FOMC voter Dudley was less direct. He simply said when liftoff happens it won't be a big surprise and it will signal the Fed's confidence in the economy. Mester, who is not a voting member this year shares Lockhart and Lacker's view that the economy can handle a 25bp move. In his first speech as Dallas Fed President, non-voter Kaplan said it is appropriate for Fed policy to remain accommodative for some time but accommodative doesn't necessarily mean zero Fed rates. He also warned that staying too long at zero could distort investments.

The FOMC minutes show that the Fed is ready to raise interest rates but that was not a surprise because back in October they breathed new life into the dollar by saying they would make a decision about raising interest rates at the next meeting. Today we learned that they wanted to convey that December liftoff may be appropriate barring unanticipated shocks. In fact "most Fed officials feel liftoff conditions could be met by December." The FOMC minutes drove USD/JPY to its strongest level in 3 months and USD/CHF to its strongest level in 10 months.

The euro remained under pressure, falling to a fresh 7 month low versus the U.S. dollar. With no Eurozone economic reports released today, expectations for ECB easing continue to drive the currency. German 2 year yields fell to its lowest level ever with markets now pricing in a 10bp interest rate reduction. ECB member Mersch's attempt to reassure investors that there is no indication of economic pessimism after the Paris attacks failed to be acknowledged by the market. We continue to look for the EUR/USD to test 1.0520. The minutes from the last ECB meeting are scheduled for release on Thursday and they should reinforce the ECB's dovishness.

Sterling ended the day unchanged versus the euro and U.S dollar. Considering that it was also a quiet day for the euro, today's performance confirms that sterling has been driven by EUR/GBP flows. U.K. retail sales are scheduled for release tomorrow and based on the decline in spending reported by the British Retail Consortium and the drop in wages the risk is to the downside. September was also a very strong month for spending so a cutback in October is not unusual.

USD/CAD resumed its rise today despite a smaller than expected increase in oil inventories. Prices have been pressured by oversupply and for the first time since August, WTI crude dropped below $40 a barrel. We still believe that USD/CAD will peak near 1.3450 and oil will bottom not far from $40.

The New Zealand dollar extended its losses following yesterday's dairy price auction. Producer prices and job advertisements are scheduled for release this evening and given the smaller increase in CPI in the third quarter, chances are price growth will remain muted.

The Australian dollar declined on the back of mixed data. Westpac leading indicators rose by 0.1%, the same amount in October as September. The Conference Board on the other hand reported a decline. Wages also increased 0.6%, keeping annualized growth at a steady 2.3% pace. Despite the resilience of the Australian dollar, copper and gold prices have fallen hard in recent weeks and we believe that these moves will catch up to the Australian dollar soon. Since the beginning of the month copper prices have fallen 8.6%, iron ore prices and gold prices are down 7% and yet A$ has fallen only 0.5% versus the greenback.