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The US dollar weakness suggests market participants are expecting more dovishness in today's FOMC meeting

By OFX

The US dollar index fell sharply in yesterday’s trading session when major news in the US-China trade saga came to the markets. The US has asked China to keep its currency stable, in a move aimed at discouraging officials in Beijing from devaluing the currency to offset the impact of sanctions. This request may backfire though, because a more managed Yuan would reverse China’s longer-term policy of allowing market forces to set the level of the currency. The USD/CNH (US dollar – Chinese Yuan) fell around 0.4 in yesterday’s session (stronger Yuan).

Today, the most critical piece of data will be published at 2:00 pm EST, when the FOMC meeting minutes are released. This should shed light on the decision to drop a promise for “further gradual increases” from the policy outlook.

Yesterday, the Federal Reserve Bank of Cleveland President Loretta Mester (known as a “hawk” with interest rates) called for an end to the reduction in the size of the central bank’s balance sheet. She said she would like to see it finish before the year is over, echoing comments from Governor Lael Brainard last week. This heightened speculation of a dovish set of FOMC minutes later today, which was reinforced by Fed Williams who said it would take a different outlook on inflation and growth to hike rates, enhancing the “Fed’s patience”.

The USD/CAD pair continues falling, shedding around 100 pips from the start of the week. The barrel of crude oil (West Texas Intermediate) for March delivery held close to USD 56, and crude remained at a three-month high despite all the current global growth concerns. Furthermore, Saudi Arabia’s production cuts continue to keep a floor under the price.

This morning, the Loonie is one of the best performers amid a consolidation of US dollar losses from yesterday. All the major currencies - Euro, Pound, Yen, Aussie and Kiwi dollar - are losing slightly this morning. The exception is the Loonie, which is appreciating around 0.22 percent against the US dollar this morning. The reason: the price of crude.

Another catalyst, aside from crude, was the US asking China to keep its currency stable. This should be taken with caution however. Guan Tao, former Director General of Balance of Payments at the State Administration of Foreign Exchange in China said, "…any promise would be unlikely to be very specific. It's more likely to resemble a framework as the problems won't have specific solutions in such a short period." He added, "…a discussion of Yuan exchange rate stability should not only impose responsibilities on China, but also require cooperation from the US, such as by reducing trade frictions, slowing the pace of Fed interest rate hikes, and maintaining a stable US dollar."

Technically speaking, the USD/CAD pair might fall to around 1.3133 - 1.3150 this week if the “risk on” environment continues.

Yesterday saw a slightly more upbeat than expected German ZEW Economic Sentiment survey released, with a score picking up slightly from -15 to -13.4. A slowdown in China remains the biggest headache for German business, and recent data shows that Germany narrowly missed a recession. This highlights the struggles it is going through. It is a quiet day today, with tomorrow’s monthly Eurozone PMIs as the next event of note from the Eurozone. The EUR/USD pair sits at 1.1340, waiting for the FOMC meeting minutes at 2:00 pm.

The GBP/USD pair rallied in yesterday’s trading session ahead of another round of Brexit talks between Prime Minister Theresa May and European Commission President Jean-Claude Juncker. The EU has repeatedly refused to make any legal amendments to the Irish “backstop”, which ties the UK to EU customs rules. The UK wishes to avert a hard border returning between the Republic and Northern Ireland. Despite this, May will keep pressing for changes to the arrangement, which are outlined in her withdrawal agreement, to get it accepted in parliament. As the clock runs down, it seems we will see an extension to Article 50 requested by the UK to avert a no-deal departure. p hidden="" class="break"> 

The Aussie dollar benefited from US dollar weakness yesterday, with the AUD/USD rising from around the 0.7100 handle to reach a high of about 0.7177. This happened at 9:00 pm EST during yesterday’s trading session. A slightly weaker than expected wage growth number from Australia has since pushed the Aussie lower. The quarterly Wage Price Index number saw incomes hold steady at 0.5 percent growth, when an uptick to 0.6 percent was being eyed. Tonight at 7.30 pm EST, employment numbers will be released by the Australian Bureau of Statistics. The AUD/USD is trading at 0.7154, or a decrease of 0.12 percent, at the time of this writing.

The Kiwi flew higher yesterday, mirroring other currencies move against the greenback. The NZD/USD pair touched intraday highs of 0.6887 before retracing back to its current 0.6850 level. There is no data of note from NZ this week, so trade and the FOMC will be the main drivers of the local buck. The NZD/USD pair trades at 0.6868 at the time of this writing.