Don’t Let Minutes Overshadow EM Bust

The FOMC Minutes offered few answers but left traders feeling like they were caught in a carnival ride. On the day, the US dollar was the top performer while the commodity bloc lagged. The August China manufacturing PMI is the next hurdle for traders.

The FOMC had something for everyone. FOMC participants were 'broadly comfortable' with taper 'later this year' but there was nothing specifically pointing to September. Doves were also disappointed because the Fed sounded rather cool on lowering the unemployment rate threshold.

A series of gyrations in a 50-pip range on all the USD pairs followed the Minutes as traders hemmed-and-hawed about the meaning. Ultimately, the dollar climbed higher but not substantially. One exception was cable as it tumbled to 1.5630 from 1.5710, likely due to apprehension because of nearby resistance at the June high of 1.5752.

Ultimately, the dollar rally may have been more about emerging markets. The money flooding out of several problem areas including India, Indonesia and Turkey is looking for a home and investors may have been waiting for the Minutes before pulling the trigger.

The main focus in the hours ahead if the biggest emerging market – China. HSBC releases its manufacturing PMI at 0145 GMT. The July reading was 47.7 compared to the government reading at 50.3. Economists are expecting a 48.2 prior.

With so much uncertainty in emerging markets, a negative reading here could lead to a rout and the commodity currencies are looking particularly vulnerable after the recent declines.