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USD Retreats As Fed Dependent On Upcoming Economic Data

Published 25/05/2017, 10:36 am
Updated 09/07/2023, 08:32 pm

Originally published by Rivkin Securities

The US Dollar Index declined -0.30% on Wednesday as treasury yields fell following the release of the FOMC minutes from the May 3rd meeting. Both the 2-year and 10-year yields declined -2.5 and -3 basis points respectively as most FOMC members judged that while it would be appropriate to tighten rates again soon, this was contingent on economic data being in line with their expectations following a slowdown in the first quarter. That however did not weigh on equity markets with both the S&P 500 and Nasdaq 100 pushing to new all-time highs gaining +0.25% and +0.47% respectively.

The committee also discussed the normalisation of the FOMC’s $4.5 trillion balance sheet with staff presenting an approach where the balance sheet would be shrunk gradually by allowing increasing run-off amounts each quarter whereby the FOMC would no longer reinvest assets as they mature. Comments from Federal officials have stated that this process would be clearly communicated and operate in a predictable manner so as not to cause disruption to financial markets.

The market implied probability of a rate hike at the June 14th meeting remained unchanged at 78.5% with consensus that the FOMC will hike rates on June 14th pending no adverse economic data. Between now and then we have key data released including the advance goods trade balance tonight, a second estimate of Q1 GDP on Friday followed by PCE inflation, non-farm payrolls and wages next week.

Oil prices dipped ahead of a meeting of OPEC producers tonight where expectations are high for a minimum nine-month extension of the 1.2 million barrels per day production cuts due to expire at the end of June. This has been highly factored in to the price of oil and at this stage it is unlikely that we will see a deepening in the level of production cuts, with OPEC officials preferring to wait and see the impact of an extension in helping rebalance the market prior to taking any more drastic actions.

Both WTI and Brent crude slipped -0.33% and -0.54% after having gained over +11% since the May lows. The decline followed the release of US crude oil inventories overnight for May 19th with gasoline inventories falling less than expected with a draw of 787,000 barrels compared with estimates for a 1.075 million barrel decline. Declines were limited as this was partially offset by a larger than forecast decline in crude oil inventories which decreased 4.432 million barrels against expectations for a 2.0 million barrel decline.

Locally the S&P/ASX 200 index edged higher by +0.15% and this morning we look set to extend those gains with ASX SPI200 futures up a further +0.21% in overnight trading.

Data releases:

· US Advance Goods Trade Balance (MoM Apr) 10:30pm AEDT

· US Wholesale Inventories (MoM Apr) 10:30pm AEDT

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