FX Update: FOMC Minutes Throw A Rope To USD

 | Apr 09, 2015 05:55AM ET

Yesterday’s Federal Open Market Committee minutes were far more hawkish than the market believed they would be, as there was a robust discussion of whether the US Fed should already move in June, a scenario the market had entirely priced out coming into this meeting.

This provided a solid boost to short-term USD positioning that was looking the wrong way, but the reaction in Fed Funds futures was rather modest, suggesting the fundamental boost here is rather modest.

As I mentioned yesterday, these minutes came before the latest weak employment report and the Fed has been rather clear that it is highly dependent on incoming data for the evolution of policy.

Today’s economic calendar looks very thin, with no interest in the UK. Yesterday, the opposition Labour party leader Ed Miliband spoke out against the non-domicile tax rules that allow wealthy foreign residents in the UK to pay lower tax rates.

This should serve as a reminder that a Labour victory might be GBP-negative on the risk to capital flows into the UK on fears of a new tax regime. Such a development would mean that the positive capital account would have a harder time offsetting the country's still awful current account deficit.

On that note, we have the latest Visible Trade Balance data today, and let us remember that even during the recent years of a very weak pound, the trade deficit only worsened. This will mean something someday – but probably not today.

USDCAD saw perhaps the most interesting turnaround among USD pairs yesterday on the combination of a sharp oil sell-off punishing CAD, while the FOMC minutes boosted the greenback.

The US oil inventory data released yesterday shows that North America is swimming in oil after another massive build of nearly 11 million barrels. If this continues to weigh on the oil price, then USDCAD may finally be set to pull to the range highs and test that critical 1.3000 area that is the obvious next objective to the upside.

Chart: USDCAD

USDCAD’s reversal came just in time for the bulls, as yesterday’s action sat aside recent lows. The smart hammer reversal will have the bulls getting involved again here with the expectation that the range will hold and that we head back towards the highs of the cycle and beyond toward the massive 1.3000 area (the post-global financial crisis highs).

Risks to the upside view include tomorrow’s Canadian jobs report, any fresh strength in the oil market, and incoming US data.