Good morning,
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Dollar weaker as Fed minutes reveal uncertainty
With Chelsea losing overnight and the dollar slipping back from its recent highs it’s good to see some of the dominant forces taken down a peg or two as 2017 continues to open up. While Chelsea’s fall came as a result of a lack of midfield dominance, the dollar’s weakness is once again down to uncertainty around what the US economy will look like with Donald Trump at the helm.
While the notes from the US central bank were largely hawkish on rates; tightening labour markets, higher wages and fiscal stimulus boosting inflation and necessitating interest rate increases, the amount of uncertainty around what that stimulus will look like and how this will need to be communicated to both the markets and the wider US population weighed on the dollar.
Before the meeting, interest rate markets were only giving a 1-in-3 chance of 2 rate hikes by the end of 2017 and while that is still the case, the probability of a hike in March has fallen by a fifth. This will keep the dollar lower for a little while but we would also not be surprised if speculators are not also aware of today’s non-manufacturing ISM number and tomorrow’s payrolls and wages announcements. Dollar has been on a great run and could easily be taken higher by the data again in the next 36hrs.
Data coming but does it matter?
OThat being said, the dollar has not been able to gain on strong data on Tuesday or yesterday so there may be a feeling that the USD is overstretched at current levels and some certainty on the forces that have driven the greenback as high as it is now may be needed to continue the run.
Chinese yuan flies higher as authorities squeeze on outflows
TThe Asian session has been a busy one with a supreme amount of volatility for the Chinese yuan. The CNH has spent two days breaking records for daily gains against the USD as funding levels remain tight and outflows from the Chinese mainland continue apace. This comes after reports that the People’s Bank of China is war gaming and stress testing the country’s currency in light of possible pressures from a Trump presidency. This could easily be the Chinese authorities trying to keep the currency strong ahead of the Trump presidency but for now, there are simply not enough CNH out there. So much so that the interest rate on borrowing CNH in Hong Kong for one day is 96%.
Square that with the rise in bitcoin to over $1000 and we can see that these flows are persistent and large but a reversal, much like January’s volatility last year, is hopefully not too far off.
This will likely continue tomorrow however as trade weighted dollar is taken lower. This would lead the People’s Bank of China to lower their USDCNY fix continuing the ongoing pressure.
The Day Ahead
A lot of market focus will stay on the moves out of Asia but services PMIs from across Europe and the UK will also generate some impact. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30.
Have a great day.