FOMC Minutes Conflicted, AUD Dumped

The FOMC Minutes played out largely as expected but the market may be focused on the wrong things. The Aussie maintains its volatile ways, losing against all currencies after having risen initially on a strong jobs report before falling off on Reuters reports that China has banned coal imports from Australia. A new trade action was issued on the Premium index trade.

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Early on Wednesday, we warned about the FOMC Minutes sending conflicting signals about the positive domestic outlook and negative signs abroad. That same paradigm unfolded as the commentary singled out soft Chinese and European growth multiple times while underscoring a solid view at home.

More importantly, the Fed signalled its intention to halt the unwinding of its balance sheet later in the year. “Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve's asset holdings later this year.” This triggered interpretations that any USD positives or risk-off effect from the Fed's selling of its reserves would stabilise (possibly in the 2nd half of the year) when the unwinding dissipates.

The US dollar climbed about a quarter-cent across the board after the Minutes but this news alone is unlikely to be the spark of a new dollar rally.

One tidbit that could have a more-lasting effect came from equipment manufacturing giant Caterpillar who highlighted 'very strong' demand from China. The company has good visibility into global trends and also had one of the earliest warnings in April 2018 about slowing global growth.

Elsewhere, Fitch warned it could downgrade the UK by shifting it to ratings watch negative in an unusual move outside of the regular EU-mandated ratings schedule. The initial reaction was a hiccup lower in GBP but the statement outlined that a cut from AA would only come on a no-deal Brexit or a deal that hurts UK economic prospects.

In other Brexit news, Spain's foreign minister said the UK and EU were hammering out a deal in an interview that lifted the pound. That partly faded on skepticism that he had inside information. After all, everything from EU-UK negotiations has leaked for months. We doubt they would be able to keep that much progress under wraps.