Fed minutes hit the dollar
Dollar is weaker this morning following the latest set of minutes from the Federal Reserve. The probability of a rate hike at the Federal Reserve’s September meeting has fallen to 38% from 48% this time yesterday and 52% a couple of weeks ago.
The reason is inflation, or more pertinently, the lack thereof. As we were told yesterday, inflation in the US remains at stubbornly low levels with the year on year increase a rather miserly 0.2%. Core inflation is stronger at 1.8% but still below the 2% that policymakers view as a happy medium. Although the labour market improvement has continued, the increase in employment has not tightened the wage construct enough to create inflation…yet.
Has much changed?
The minutes also noted that many members “continued to see some downside risks arising from economic and financial developments abroad” though the risks to the domestic outlook were “nearly balanced”. I have been working in markets for 13 years now and I am struggling to think of a time where there weren’t risks from abroad. If the Chinese devaluation of the yuan is enough to put off the Federal Reserve from starting a policy of normalisation then we were never ready in the first place.
USD weakening is a bit of capitulation from traders overnight. I am certainly not left more confident in my thoughts of a September rate hike but take solace in the overall strength of the US economy, the resilience of the jobs market, financial stability and the belief that once the first year of low inflation courtesy of lower commodity prices comes to an end, a pull higher will occur.
Oil lower, EM getting hurt
Commodities remained very much in the firing line yesterday with oil prices getting a real slap. Brent crude and West Texas Intermediate measures both fell by around 2% yesterday following the release of larger crude reserve numbers from the United States. Other commodities were taken with it and the commodity currencies to which their terms of trade are pinned to came lower as well. Mexican peso hit record lows against the US dollar yesterday afternoon with EM market assets getting smoked as well.
There is one currency that has lost a lot more overnight – the Kazakhstani tenge. In the spirit of Crocodile Dundee combatting a mugger, Kazakhstan looked at China and said “that’s not a devaluation, THIS is a devaluation.” The tenge is down around 25% overnight following a decision from the central bank to freely float the currency. Astana is lovely this time of year if you’re looking for a bit of late sun.
Today
Datawise, this morning we have the latest UK retail sales at 09.30 which should be driven higher by the low inflation/growing wage dynamic. The market is looking for a year on year increase of 4.3%.