Dollar Slips as Fed Minutes Fail to Impress

The September Federal Reserve minutes failed to impress and while USD/JPY held onto its gains, the greenback fell sharply against all other major currencies. This weakness drove EUR/USD above 1.1850 and helped the pair end the NY session at its highs of the day. It also took GBP/USD back above 1.32 and USD/CAD well below 1.25.  Now lets be clear, the Fed minutes were not dovish.  According to the report, "many Fed officials saw another rate hike this year" as they don't see the storms knocking the economy off track. They also saw wages rising, which should help to boost future inflation.  The only problem was that "many Fed officials were concerned that the low inflation is not transitory," and a few even wanted hikes delayed until inflation ticks higher.  Although Fed fund futures did not budge one iota after the Fed minutes, this specific line was enough to cast doubt amongst currency and treasury traders. In a week when North Korean tensions prevented the dollar from rallying, the lack of unambiguously hawkish FOMC minutes was just the excuse that FX traders needed to send the dollar lower. The situation with North Korea is likely to worsen in the coming days/weeks with NK's foreign minister saying Donald Trump "has lit the wick of a war" and "we need to settle the final score, only with a hale of fire, not words." We expect to see another 24 to 36 hours of dollar weakness before consolidation ahead of Friday's inflation and retail sales reports.  Producer prices and the weekly jobless claims report are scheduled for release tomorrow but these numbers don't tend to have a significant impact on the currency.  Retail sales and CPI on the other hand are expected to rise which should stem the dollar's slide towards the end of the week.

The best performing currency today was the euro, which completely shrugged off Catalonia's political troubles.  Investors appear to like Spanish Prime Minister Rajoy's firm response to the region's strive for independence. Rajoy gave the Catalan government 8 days to drop their independence bid or he would rescind their political autonomy and rule the region directly. There was a lot of confusion yesterday when the Catalan president signed an independence declaration but then suspended the effects of the declaration for a few weeks while they engaged in dialogue with the Spanish government.  The Spanish government on the other hand doesn't seem to have any interest in talking as they view the referendum as illegal and a violation of the constitution. If Rajoy terminates the government and seizes control of Catalonia, it would cause quite a bit of internal strife but the markets may view his unwavering refusal to allow Spain to break up as positive for the euro. With the European Central Bank gearing up to reduce stimulus at the end of the month, there's scope for furher gains in the euro.  The most important event risk for the euro on Thursday will be ECB President Draghi's speech. As he will be taking part in a monetary policy panel, it may be difficult for him to avoid talking about ECB policy. 

Sterling extended its gains against the greenback for the third day in a row. There were no U.K. economic reports released today but between the decline in U.S. yields and the rise in U.K. yields, GBP/USD spent most of the day in positive territory. Over the past 3 weeks, GBP/USD has fallen aggressively because of political uncertainty but throughout this time, rate hike expectations never changed.  The market is still pricing in a 75% chance of a hike in November and an 80% chance of a hike before the end of the year.  Investors have quickly forgotten about the Bank of England's hawkishness but as data improves, they will be reminded of the central bank's intentions. We expect GBP/USD to test its August high near 1.3270 but it could possibly extend its gains up to the 20-day SMA near 1.3350. 

All 3 of the commodity currencies traded higher against the greenback today with the Canadian dollar leading the gains. No Canadian economic reports were released  but after trading heavy for most of the week, the FOMC minutes was just what USD/CAD traders had been waiting for to take the currency pair lower.  Now that it has closed below the first standard deviation Bollinger Band, the next stop should be the 20-day SMA near 1.2390.  The main focus for Canada tomorrow will be Bank of Canada Deputy Governor Wilkins' speech. The Australian and New Zealand dollars ticked upwards but AUD/USD failed to recapture 78 cents despite stronger consumer confidence.  The New Zealand dollar on the other hand appears to be in the process of a forming a bottom above 70 cents.