The Fed Is Doing 'Absolutely' Nothing To Encourage USD Bulls

[thenews]

“Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labour utilization in recent months” says the FOMC statement. ”Near-term risks to the economic outlook have diminished.” Finally, “with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market indicators will strengthen”. I suppose the crucial world is ‘gradual’. This Fed hiking cycle is much more glacial than gradual and the first reaction to the Statement has been for nominal and real US bond yields to fall, taking the dollar down against every major currency except for the pound. Nominal GDP growth is trundling along at a rate of 3.3% in the last year, 3.5% since the end of the last recession. Fed Funds look absurd by comparison, but with very little upward pressure on inflation, we’ve all become numb to the notion of the Fed adjusting quickly to any kind of normal.

The Fed, in short, is doing absolutely nothing to encourage anyone to hold any bullish dollar thoughts, leaving currency markets to be driven by what happens elsewhere. DXY looks awfully high relative to TIIPS yields as we head towards a definitive outline of Japan’s upcoming fiscal package, and tomorrow’s BOJ meeting.

We still expect the BOJ to cut rates and increase the pace of asset buying modestly and I still think that will support USD/JPY but the market would be disappointed if nothing happened

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