Inflation Question Divides Fed

The final piece of the rate hike puzzle is inflation and Fed Vice-Chair Stanley Fischer said Monday he wants to see progress before making a move. That clashed with continued hawkish rhetoric from Lockhart and that hurt the US dollar in New York trading. The upcoming Asia-Pacific schedule is light but all eyes will remain on China. Ashraf issued new notes and charts on the existing Premium  trades in EURAUD and USDCAD, each of which  is +110 pips in the green.

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The core of the Fed no longer believes that US unemployment is a major problem but officials have yet to see the typical signs of wage inflation from a tight jobs market. For some, like Lockhart, it's just a matter of time. He reiterated that he's prepared to hike in September and said he will look to inflation to guide subsequent hikes.

For others, like Fischer, he's reluctant to move before inflation begins to rise. He said that if the Fed were solely focused on inflation it would have to try and be more accommodative, if possible. He comments kicked off the run on the dollar that extended throughout the market, except against the yen. Cable was particularly perky, rising more than a cent off the lows to 1.56, even as Miles took a less-hawkish approach. This explains why Ashraf pointed out 2 weeks ago the theme of this year's annual Fed conference in Jackson Hole is inflation & monetary policy (rather than labour markets). 

Beyond the Fischer comments, the overall theme was a retracement of the trend on a quiet news day. We highlighted crowded bets against the Canadian dollar yesterday and that trade was quick to be undone as oil prices rebounded 3%.

For commodities, the focus is on China were the market has gone into a mode where it aggressively bets on stimulus on any bad news. The PBOC is a tough central bank to time but we wonder how long the market will remain patient.