The Greenback was off to a positive start for the U.S. session but the climb didn’t last when the factory orders report and FOMC minutes were released.
- U.S. factory orders down by 0.8% versus projected 0.5% dip
- U.S. IBD/TIPP Economic Optimism index fell from 51.3 to 50.2 vs. 51.6 forecast
- FOMC minutes showed policymakers still divided on unwinding timeline
- FOMC: Softness in inflation due to ‘idiosyncratic factors’
- FOMC: Let economy run above full employment for some time until inflation picks up?
June FOMC meeting minutes
Dollar bulls had hoped to get more clues on the Fed’s timetable for the next rate hike and their balance sheet reinvestment operations, but the FOMC minutes provided little clarity.
Instead, the transcript of their huddle last month revealed that policymakers had a range of views when it came to the timing of balance sheet normalization.
Some thought that it would be appropriate to kick things off in a couple of months while others believed that waiting until later in the year or early 2018 would be more prudent as this would give them more time to assess the growth and inflation outlook. A few also expressed concerns that such a move might be misinterpreted by market watchers as a less gradual approach to tightening. As the minutes noted:
Several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would.
When it came to future rate increases, committee members reiterated their support for the central bank’s timeline, with some hawkish members affirming that more hikes are in the cards for the coming years. However, a few also expressed concerns that succeeding rate hikes could make it more difficult for the economy to achieve its 2% target inflation.
Lone wolf Kashkari dissented the decision to hike in June, citing that he preferred to wait for additional evidence that the dip in inflation is temporary. U.S. markets had a mixed reaction to the release:
- Dow 30 index fell 1.1 points (-0.10%)
- S&P 500 index closed 3.53 points higher (+0.15%)
- Nasdaq ended 40.795 points in the green (+0.67%)
- U.S. 5-year bond yields down 1.6 bp, 10-year yields down 2.5 bp
Crude oil retreats from its rally
Black Crack seemed exhausted from its recent climb as it tumbled more than 3% on profit-taking and the lack of resolve from Saudi Arabia.
You see, there has been an ongoing rift between Gulf states and Qatar as the latter has been accused for supporting the war in the region. Last month, Saudi Arabia cut its diplomatic ties with Qatar then gave a list of demands that it needed to comply with a few days back.
However, Saudi’s imposed deadline is already approaching and the threat of further sanctions is becoming all too real. If tensions continue to escalate, it could make the OPEC’s output deal more challenging to implement as member nations are divided. It doesn’t help that Libya, which is part of the cartel but exempted from the cuts, has been gradually increasing its output while the drama is going on.
- WTI crude oil is down to $45.53 per barrel (-3.29%)
- Brent crude oil settled at $48.35 per barrel (-0.17%)
Major Market Mover(s):
The Loonie had a rough day as it reacted negatively to the drop in crude oil before getting back on its feet later on.
USD/CAD popped up to a high of 1.3015 then fell back to 1.2961, CAD/JPY retreated from 87.59 to a low of 89.62, EUR/CAD advanced to 1.4746 then fell back to 1.4708, and GBP/CAD pulled up to a high of 1.6813.
Watch Out For:
- 2:30 am GMT: Australian trade balance (wider surplus of 1.00B AUD expected)