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What are we expecting from the minutes?

The dollar rally remains on a roll while oil prices pared back some gains in the overnight session. Equities were seen taking corresponding dip.

Crude Oil
Source: Bloomberg

The release of September’s Fed FOMC minutes looms ahead and the market can be seen pricing in their expectations well ahead.

Are we really going to be surprised should the Fed FOMC go ahead with their next hike in December? The market appears to be acting strongly on this expectation lately and taking today’s Fed FOMC minutes as a support for the expectation. The probability for a December Fed hike currently sits at 67.6% and have climbed despite the weaker than expected non-farm payrolls data last Friday.

With knowledge of three dissenters in the house, hawkish notes are expected to be delivered from the minutes to be released today. Notably, the dollar index printed a fresh 7-month high at 97.732 on Tuesday and is hanging high at 97.500 levels into Wednesday morning. This bears close resemblance to levels seen a year ago ahead of the first Fed hike in nearly a decade. We will be closely watching for a build up towards the 98.000 handle.

Asian currencies have correspondingly been weighed by this development. The exception was with USD/JPY. Traders appear to be reluctant to place all their eggs in one basket and have diversified to JPY. USD/JPY reversed to trade on either side of 103.50 after failing to break out of the 104.00 psychological level.

The MSCI emerging market FX index fell by 0.8%, the largest one-day drop since 9 September. Emerging Asian currencies are expected to remain caught in this turmoil, much like what was seen a year ago. The additional factor of the US Presidential election is likely to introduce higher volatility, but is unlikely to tamper with the build-up in dollar strength in the longer run.

Equities meanwhile were hit with a double whammy. Fed hike expectations coupled with softer oil prices brought the S&P 500 index to a loss of 1.24% at Tuesday’s close. The oil story is still developing with traders now casting doubts over the Russia’s commitment. Conflicting statements from the head of Russia’s state-controlled petroleum company, Rosneft, and Russia’s energy minister saw oil prices paring back gains. WTI price was last seen lurking just below US$51/bbl but remains above US$50/bbl with the optimism not totally wiped out.

 

Better than expected machine orders for Japan

Separately, stronger than expected machine order for Japan arrived in the morning, though the figure had slipped into negative territory at -2.2% MoM, from 4.9% MoM in July. In YoY terms, machine orders rose 11.6% YoY in August, sustaining the uptrend. No major reaction was seen in USD/JPY, with JPY holding its weight despite the USD rally overnight.

Yesterday: S&P 500 -1.24%; DJIA -1.09%; DAX -0.44%; FTSE -0.38%

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