The release of FOMC minutes to the end of July meeting brought more uncertainty with regards to the timing of the next increase in rates. This can be seen in the reaction of the dollar, down 0.4% on the back of the release. The minutes themselves were expressing caution with regards to the inflation outlook, but were naturally more bullish on the labour market. Herein lies the dilemma for the Fed, whether to look at inflation and expectations thereof, or the labour market. Both form the legs of their dual mandate to achieve maximum employment and stable prices (together with moderate long-term interest rates). In terms of market pricing for a move, we are back to where we were around 3 weeks ago, with short-term interest rate markets suggesting that on balance rats are likely to remain on hold.
This complicates the outlook for FX, with bigger picture strategies playing on policy divergence once again struggling. The Aussie finds itself weaker overnight on the continued fragility seen in China. For the most part, Australia has shown a certain degree of resilience to developments in China, but the link has not been fully broken by any means. Elsewhere, emerging markets continue to be under pressure. Earlier this week it was the South African rand under pressure, with the Turkish Lira taking it on the chin, having weakened against the dollar for the past 5 sessions and touching the 3.00 level on USDTRY. Looking at a broad basket of emerging market currencies, they have now unwound the rally seen in the wake of the Fed minutes last night and are now lower that levels prevailing before the release. This reflects the fact that it’s not just about the Fed, there are plenty of country specific factors weighing. Focus today is on the UK retail sales today, together with US weekly claims and existing home sales data.