In Yellen We Trust

by: Dean Popplewell

By Stephen Innes

The market spent the better part of Wednesday paring back USD exposure ahead of the FOMC minutes after Dr. Yellen soft pedalled the reflation rhetoric, all but signalling to the markets that absentee US inflation remains a substantial concern amongst Fed members. This year the Fed's top dogs have time and time again restated their confidence that inflation will revive despite their preferred price measure slipping to 1.3 percent, well below the 2-percent target. But this morning release of FOMC October minutes indicates the board's ship is listing towards inflation concerns or the lack thereof to be more specific.

Speaking of listing ships, the USD price action is echoing the market's concerns over inflation. But frankly, the minutes did little more than embody what we've heard in recent Fedspeak. However the statement does clear the air of one raging debate, and that's 2018 rate hikes unambiguously depend more pressingly on inflation than on growth. This apparent shift suggests policy normalisation may be less perceptive to US economic performance than the dollar bulls were anticipating.

Despite the fact that the dollar sold off rather aggressively overnight, APAC currency markets have a "gone fishing" feel this morning, exhibiting few concerns about the slide. However, with few looking to press the USD issue one way or another, the markets have that distinct holiday feel about them.

Not to sound like the eternal USD bull, I can't help but think the Feds are looking over their shoulder concerned that if asset prices keep going higher the fear of the asset bubble eruption may outweigh concern about inflation.

Speaking of which, US equity markets continued to surge reaching Amazonian proportions. The high tech-laden Nasdaq notched out another record high after Amazon's (NASDAQ:AMZN) share rose 1% after a deal with their cloud-based unit and Cerner was inked. But Wall Street closed mixed in a low volume day. The Dow Jones Industrial Average and the S&P 500 were a tad softer while the NASDAQ was slightly higher.

The Japanese Yen

USDJPY was under pressure in the lead-up to the FOMC but experienced a cascading effect lower as stop-loss selling intensified on a break of the 111.60 support line after the minutes were released. How much liquidity conditions undermined the dollar weakness is tough to gauge, but the dovish FOMC rhetoric is not.

The Euro

Besides the FOMC minutes catalyst, the euro is getting a bonus bounce from reports that the EU and UK will come to terms with the Brexit divorce bill.

Asia FX

It is all aboard the ASEAN party bus USDTWD, USDKRW, USDMYR and USDTHB are hitting fresh year lows.

The Korean Won

In addition to the weaker USD narrative, supportive inflows, strong domestic macro conditions and BoK rate expectations bolstering the won, the latest bounce comes on the back of long dollar hedge unwinds as geopolitical risk abates.

Malaysian Ringgit

Besides the macro bounce supporting the MYR, the weaker USD post FOMC minutes will continue to support over the short term.

And while the only thing that does matter for oil prices is the month-end OPEC meeting, WTI oil prices managed to hang on to yesterday's gains. Prices were supported by an oil leak in the Keystone pipeline and the EIA report of a decline in US Crude inventories. This does add to the positive MYR narrative.

But the primary catalyst for the stronger MYR over the past 24 hours is surging bond and equity inflows which are accelerating real demand for the ringgit.

Philippine Peso

Like the regional peers, the peso is expected to reap the benefits from US inflation dilemma and softening USD. But the core driver remains a boisterous regional equity rally that is benefiting from capital inflows, solid economic fundamentals and the de-escalation of regional geopolitical tension.