Major currencies gained against the USD in the wake of the FOMC’s July Minutes, which failed to provide a smoking gun for a September rate hike.
Commodity currencies trail the pack, as the price of WTI crude oil fell to a new six-year low.
The USD sold off despite the fact FOMC members considered that economic factors had continued to improve, and the point of lift-off was nearing.
The Minutes confirmed that the modifier “some” in “some further improvement in the labour market” was added to convey progress in the economy.
But in the wake of relatively hawkish Fedspeak in recent weeks, the market was disappointed that there were no clear signals that a September rate hike was actively considered.
In particular, the rather cautious discussion around wages and inflation caught our eye. In June, with both oil prices and the USD plateauing, the Fed had dialled down its concern about the disinflationary impacts of both.
But in these July Minutes, FOMC members pointed out downside risks to inflation from both commodity prices and the USD.
What’s more, there was a deeper discussion about the failure of wage pressures to become evident, despite clear improvements in the labour market (as seen in payrolls growth and falling unemployment).
For us, this signals a relative shift in scrutiny away from the labour market to the inflation side of the FOMC’s mandate. All else equal, continued sogginess in price pressures in the face of labour market gains would bias the FOMC to delay tightening beyond our forecast of a September lift-off.
What won’t have been lost on investors is that US oil prices have fallen nearly 16% since the July FOMC meeting, including last night’s 4.6% plunge.
The latter was driven by a very strong (and unexpected) increase in US oil inventories last week. This will prove disinflationary, albeit at a headline level as opposed to core prices.
The July CPI report for the US saw both headline and core inflation undershoot expectations.
For NZD/USD, the night’s news helps to support the idea that the path of least resistance is higher.
NZD broke above 0.66 and traded through initial resistance at 0.6610. We expect stronger interest to sell will emerge at 0.6660 and close to 0.67, as investors remain keen to get long USD on a medium-term basis.
Today, the local ANZ consumer confidence survey will be watched, with its current 113.9 reading putting very close to long-term averages.
Offshore, we’ll be watching Fedspeak from San Francisco Fed President Williams, and the Philly Fed Index.
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Raiko Shareef is on the BNZ Research team. All its research is available here.