• US dollar whipsawed by the Federal Reserve account of the January meeting
  • Odds for the fourth rate hike this year grew a little as some FED members pointed to the likelihood of more hikes
  • Wall Street ended the day with losses, China came back after its one-week long New Year holiday

The Federal Reserve shook investors substantially yesterday evening when the minutes were released. While the knee-jerk move was to a USD negative which saw US yields falling, all that moves were completely erased after a while when they analysed the report thoroughly. What did the FED say?

So, first and foremost the minutes need to be taken with a grain of salt as they did not include any remarks on the heavy sell-off taking place at the beginning of this month, thus they could seem to be somewhat more hawkish than it could have been. The takeaway is a majority of FED members say that stronger growth increased the likelihood to see more hikes. In this respect, it seems that the Federal Reserve still believes in the macroeconomic IS-LM model suggesting the more expansionary fiscal policy the larger need to tighten policy at a quicker pace. Let us remind that the Congress passed an extension of deficit by $300 billion over the next two years in order to avert a government shutdown. This sum in conjunction with the tax overhaul (it’s forecast to increase deficit by $1.5 trillion) leads to an extraordinary fiscal injection to the US economy at a time when it expands at the robust pace.

Moreover, members described risks to the economy as roughly balanced, albeit several of them saw increased risks in the near-term. Finally, they warned that some imbalances in financial markets are likely to occur as the economy operates above its potential. Overall, the minutes offered a slightly more upbeat tone with regard to expected economic growth and therefore we witnessed a subtle increase as for chances for the fourth move in rates this year.

link do file download linkTechnically, the US dollar index (USDIDX on xStation5) finally broken above its short-term resistance in line with our projections we presented at the beginning of the week. Bulls could eye 90.5 as their nearest target but one may suspect that they could struggle to move above it. On the other hand, a hefty rise in the US 10Y yield (it crossed 2.95% yesterday evening) could help the greenback continue recovering in the short-term. Source: xStation5

Otherwise, the Japanese yen seems to deserve more attention as well as it’s the sole major currency being able to resist the greenback strength in the morning. It could stem from the fact that Wall Street ended the day broadly lower. Furthermore, the potentially faster pace of US rate hikes might lead to increased risk aversion as the higher discount rate could undercut the current stocks’ valuation and for that reason the yen may experience some demand. Given that the yen is so reluctant to fall at a time when the US dollar strengthens across the board one may assume that it could be an interesting long-term pick for currency investors as it remains still substantially undervalued.

Finally, let us recall that China came back after its one-week long New Year holiday. In response to the latest events across global equities the Shanghai Composite grew over 2%, however, the Japanese NIKKEI (JAP225) fell almost 1.1% while the Hang Seng (CHNComp) is trading 0.6% just a while before the close. Meanwhile, Wall Street saw moderate drops as well with the Dow Jones (US30) going down the most by 0.7%.

link do file download linkFrom a technical point of view the SP500 (US500) is approaching a crucial support at 2680 points which needs to be defended if bulls want to continue marching higher. Source: xStation5