A New Challenge to the Currency Crown

The US dollar fell after the FOMC minutes but market participants are left with a familiar feeling of 'what else is there?' But this time there could be a new challenger as cable rallied again to lead the way. The loonie and Swiss franc lagged. Japanese trade data is due next.  In today's Premium insights, we issued a new GBP trade in addition to the GBPCHF (currently netting 220 pips), GBPUSD( +90 pips), USDCAD (+110 pips), while other trades include NZDCAD and AUDNZD.  Today's trade is accompanied by 3 charts, a technical and fundamental explanation.

The FOMC minutes were the highlight of the day as the FX market got a momentary reprieve from following Greek headlines. The Fed statement after the Jan 28 meeting left a distinct hawkish impression and helped the US dollar but the Minutes were much more cautious, with many participants saying they were inclined to stay at zero for longer.

But keep in mind that the Minutes are a snapshot of how the Fed saw the world three weeks ago. Oil is 15% higher since then, stocks are at a fresh record, yields are higher and non-farm payrolls were extremely strong. The Fed will probably want to have a June hike as an option and the only way to do that is by removing 'patient' from the statement.

The rates market is a solid reflection of the change after the minutes with the probability of a June hike falling to 54% from 64%.

Even if the Fed stays on the sidelines, traders will struggle to hold other currencies. Kuroda gave a fresh green light to more yen weakness after the BOJ and Sankei reports today that the BOJ could delay the timing of hitting its 2% inflation target, something that would diminish pressure to do more QE.

The commodity bloc remains tied to commodities, including a steep fall in crude prices late in US trading after a massive build in API inventories. And the Eurozone is still in a Greek existential crisis.

The other bright spot might be cable. After a sharp fall to start the year, it's been climbing steadily. The BOE sees inflation rising 'fairly sharply' next year and the urgency to hike could come sooner after wages rose 2.1% in Q4 compared to 1.7% expected.

In the near term, the focus in on Japan with January trade data due. The yen is helping with exports expected up 13.5% y/y but a 1.6T yen deficit is still a headwind to growth.