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Fed minutes lift the greenback

FX markets were pinned on the Fed, with the main theme from US trade being modest US dollar strength on the back of the FOMC minutes. 

This was despite disappointing building permits and housing starts data. Unless there is a significant shift in conditions, the Fed is likely to continue tapering at a pace of $10 billion a month. A key discussion was around the unemployment rate approaching the 6.5% threshold and what this means for rates. With the unemployment rate falling to 6.6%, this really puts the notion that rates will not be raised until at least 2015 into question. As a result the FOMC is preparing to amend its forward guidance on when it might begin to raise rates. With members split between providing quantitative or qualitative guidance, I wouldn’t be surprised to see a switch to a mix of the two. It is hard to see rates being raised while inflation remains below target.

China PMI in focus

AUD/USD is on the verge of breaking below the 0.90 level, with subdued risk appetite weighing on sentiment. Minutes essentially removed any glimmer of hope that perhaps the recent poor run of data would deter the Fed. While there is no local data today, we have the HSBC flash manufacturing PMI which is expected to come in at 49.5. Data is due out at 12.45 and we really need to see a bounce back after a slump last month. A disappointing reading will only mount pressure on risk, which seems to be on the back foot at the moment. Following the recent rejection of January highs in the 0.908 region, there is a strong chance we could see the pair head back to 0.89, should 0.90 be broken.

Japan’s trade deficit widens

USD/JPY has remained fairly sidelined at 102.30, despite disappointing trade balance figures. Japan’s trade balance came in wider than expected, with a sharp drop in exports, while imports rose. This was quite surprising given the weaker yen would have been expected to underpin exports. However, the weekly fund flows data showed a positive swing in Japan buying foreign bonds and stocks, while foreign buying of Japan bonds and stocks dropped. Seeing this data didn’t result in much movement; we’ll have to monitor US economic data with CPI, unemployment claims and flash manufacturing PMI data due out.

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