Why the Fed Minutes Could Boost the Dollar

Although the U.S. dollar traded lower against all of the major currencies today, by the end of the NY session, USD/JPY recovered a large part of its losses.  The initial sell-off was driven by reports that North Korea has the capacity of launching intercontinental missiles that could travel 3000km, putting them within reach of U.S. territory.  While President Trump's recent comments led some investors to believe that the President's focus shifted elsewhere, North Korean tensions remain front and center.  Just a few days ago, President Trump said this is the calm before the storm and only one thing will work and that's not penalties, negotiations or agreements.  With North Korea provoking the U.S. once again, it should only be a matter of time before the tensions escalate and USD/JPY is the most vulnerable to North Korean troubles.  No major U.S. economic reports were released today as the dollar extended its decline on the back of lower Treasury yields.  Support in USD/JPY is at 111.90 and we believe this level will hold ahead of Wednesday's FOMC minutes.  The last time the Federal Reserve met, they focused on the improvements in the economy, downplayed the impact of the hurricanes and confirmed their plans to raise interest rates one more time in 2017 and three times in 2018.  The dollar soared against all major currencies and we expect the FOMC minutes to help the dollar by reinforcing this hawkishness.  

EUR/USD drifted up to 1.18 today on the back of stronger economic data and U.S. dollar weakness. Germany reported a larger than anticipated trade surplus driven by a 3.1% increase in exports. Economists only anticipated a 1.1% rise in demand but imports and exports rose sharply, which is a sign of strength for the economy. The most important risk for the euro today was the President of Catalonia's speech today.  While he didn't mention secession during the speech, hours later he made it official by signing a document declaring independence from Spain.  Almost immediately the Spanish Deputy Prime Minister said he would deliver a speech to address the declaration of independence.  As the Spanish government sees the referendum as illegal, there's zero chance that the Deputy PM's speech will be one of acceptance. The Prime Minister is determined to keep the country in one piece.  On Monday he said "Spain will not be divided, and the national unity will be preserved. To this end we will employ all the means we have within the law. It is up to the government to make decisions, and to do so at the right moment." Looking ahead, the main focus this week for the euro will be Thursday's speech from ECB President Draghi. Tomorrow the performance of the single currency will be dictated by the market's appetite for U.S. dollars and since we believe the FOMC minutes will be hawkish, we think EUR/USD gains are capped at the 20 & 50-SMA cross near 1.1850.

There were a number of factors affecting sterling today but U.S. dollar weakness and manufacturing activity were the main drivers.  Although the trade deficit increased, industrial and manufacturing production grew at a faster pace on an annualized basis in the month of August.  After a long and significant sell-off, investors were relieved to see some improvements in data that helped to support the Bank of England's case for tightening.  These improvements allowed them to overlook World Bank's grim outlook for the U.K. economy. They released their upgraded global growth forecasts today and growth was upgraded for many economies expect for the U.K. and U.S. They cited political and fiscal uncertainties as U.S. risks and Brexit as the main worry for the U.K. Sterling appears very strong and poised for a move to 1.3270, possibly even 1.33.

The Canadian, Australian and New Zealand dollars all traded higher today with AUD leading the gains.  Stronger business confidence, higher commodity prices and stronger growth forecasts for China helped to propel the currency higher for the first time in 11 trading days.  Its not clear whether this recovery will continue as the pair finds resistance near the 100-day SMA.  The Canadian dollar was supported by stronger housing starts and higher oil prices. The New Zealand dollar lagged behind as lower credit card spending limited the pair's gains. Looking ahead, USD/CAD still looks heavy while AUD and NZD remain under pressure. There are no major economic reports scheduled for release from any of the commodity producing countries which means these currencies will be driven primarily by the market's appetite for U.S. dollars.