Waiting on FOMC Minutes - Forex News and Events

Waiting on FOMC Minutes - Forex News and Events

Q1 Japan GDP rebounds (by Yann Quelenn)

First quarter Japan’s GDP has printed in above expectations at 0.4% q/q with markets only expecting a slight increase at 0.1% q/q. The rebound in private consumption to 0.5% q/q at the start of the year certainly helped. Markets barely reacted to the news and the JPY did not strengthen on the release remaining below 110 yen for one dollar note. Indeed, the GDP deflator is its lowest level in two years and reflects the increasing deflation pressures that the country is facing. At the same time corporate sales are at a very disappointing -2.7% y/y.

For the time being, we maintain our view that the Bank of Japan may further ease. Fundamentals are not better as when policymakers were adding stimulus. In our view we think that the yen will remain attractive as long as global uncertainties persist. One major key driver for the USD/JPY is also the current Fed monetary policy, which is very difficult to follow. Recent declarations from Fed member Lockhart would have us believe that three rate hikes will happen this year when Fed members have been so reluctant to add rates from a quarter point. However, from our standpoint, we do not believe that a rate rise is still on the cards for this year and that one way or another markets should start pricing in the monetary policy convergence between the US and Japan, which would necessarily trigger more intervention by the BoJ.

Don’t buy the USD hype (by Peter Rosenstreich)

Economic releases and Fed verbiage had traders rethinking their USD short strategies. Tuesday’s strong US data took us by surprise, indicating that the US economy is staging a modest rebound in 2Q. Industrial production rose sharply 0.7% above consensus of 0.3% and prior read -0.6%. The increase was primarily driven by rise in utilities production as household consumed more than anticipated. The headline CPI increased 0.4% m/m in April, driving annual read 1.1% y/y mildly above consensus expectations (0.3% m/m, 1.1% y/y). Core inflation increased 0.2% m/m and 2.1% y/y. Finally on the data front, housing starts jumped 6.6% m/m, to 1.172mn, in April, above expectations of 1.135mn. This reads suggest that US 2Q GDP should come in around 2.2%.

The encouraging US data was accompanied by hawkish comments from regional Fed presidents. Presidents Williams and Lockhart both indicated that June was a “live” meeting and both suggested that 2-3 rate hikes were possible in 2016. Fed Kaplan went further stating that after a June or July rate hike the FOMC would want to take some time to assess timing and the pace of additional tighten. Markets remain completely flat foot on the issue on near term rate hikes, with IMM USD speculative shorts near highs. US short end yields quickly reacted to the news with US 2-year treasury yields climbing 4bps to 0.833%.

We remain doubtful of the current US asset rally as key FOMC members (critically Chair Yellen) have been quiet on the issue, while global economic data remains soft and unsupportive of US lone economic acceleration. Moving forward, Fed communication will be significant for the further development of the USD. However, judging from recent episodes, rogue fed comments will likely cause confusion and market volatility rather the clarity. The FOMC minutes released today should provide additional insight, potentially including the rationale for shifting the next hike from June to September, and outlook on growth and external risk. The level of divergence among member views would be interesting to hear. We see the current USD rally as an opportunity to reload on USD shorts primarily against JPY. On a side note, the recent tight correlation between USD and oil prices has now completely decoupled.