Dollar Hollar: FOMC Minutes Eyed

After last weeks Non Farm Payroll shocker and the subsequent whipsaw price action in the USD Index, Dollar traders attention now shifts to today’s release of the FOMC minutes. The USD remains in a consolidation mode towards the midpoint of its six month consolidation zone. USD bulls will be looking for some hints as to a possible lift off in 2015. Bears will be watching for further deterioration in domestic data to pressure bids.

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Mulling the minutes

Todays FOMC meeting minutes and the market read through will probably be some what disjointed by the weak September employment report released last week (142,000 payroll additions; 3‑month average down to 167,000), still the minutes’ significance should not be underestimated. Recent Fed speeches have sought to dial down the implications of the weak report. For instance, the Boston Fed’s Rosengren, a dove, said the Fed was on track to hike interest rates “before year­ end” unless growth slowed materially (he mentioned a relatively low threshold of 2.0­2.5%), dismissing the soft job data.

In light of Fed Chair Yellen’s walk back from the broadly viewed dovish post meeting press conference, it is likely the minutes may sound more hawkish, when factored against the post meeting FED speakers broad support for a 2015 lift off. It is highly likely that the minutes will emphasize that the September decision to keep rates on hold was a “close call” (as some Fed speeches have underlined lately) and that the Fed remains on track to raise rates “before year­ end” as the domestic economy continues to improve and labour­ market slack declines.

Chair Yellen’s confidence in a return to 2% inflation was overshadowed by her concerns about China and emerging markets,  the balance could shift in the minutes. It is likely the Committee will remain vague about potential action at the 27­/28 October meeting; the market perceives a rate hike at that meeting as very unlikely. The most likely window for a 2015 move is in December, but this remains a close call that hinges on a bounce in payrolls (two employment reports will be out before the meeting), as well as more stable market risk sentiment. December is a key window of opportunity to hike rates, the Fed is no doubt aware of this too, as a 2016 rate hike may prove difficult amid presidential election campaigning and likely slower GDP growth.

Markets are keen to asses any available details about Minneapolis Fed Kocherlakota’s surprising idea to implement negative rates. Chair Yellen said that this was “not seriously considered” at the meeting. Interestingly, Former Fed Chairman Bernanke said on Wednesday that negative rates may be an option (more than QE) should growth falter and stimulus be needed.

The US Treasury (UST) market has reversed the gains made in the immediate aftermath of the disappointing payroll report. This rebound, is primarily due to improved risk appetite, as the weak labour market report was seen as reducing the scope for removal of policy accommodation. On this basis,  the FOMC minutes will not likely have a sizemic direct impact on UST yields. The minutes may sound more hawkish than Yellen’s 17 September press conference, but if such a tone weighs on risk appetite, the intermediate to long end of the curve should benefit more than the short end.

Technical Takeaway

From a technical perspective the USD remains within a contracting range trade environment, triangles within triangles.

The immediate resistance is the interior descending trend line resistance at  the 96.00 level with the secondary exterior resistance at 97.50.

The immediate support is at the interior ascending trend line just below the current market rate at 94.90, with the the exterior tend line support towards the 92.50 level, as highlighted in the chart below.

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So lets define some parameters for bullish and bearish set ups

  • If price trades through the primary descending trend line resistance I will look for it to pull back from the secondary trend line resistance and monitor intraday reversal patterns on a retest of the broken descending trend line resistance as support around 96.50, leaning against the 95.00 targeting a break of 97.50 en route to retest 2015 highs as outlined in the chart below

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  • If price breaches the primary ascending trend line resistance I will look for a similar set up on the downside. A bounce from the 94.00 to retest the broken ascending trend line support as resistance. Entering shorts on an intraday reversal pattern around the 95.00 level leaning against 96.50 targeting  a retest of the August spike low at 92.50  as outlined in the chart below

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