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Dollar Jumps; Financial Markets Flip Lower on Lack of Clarity from Fed Minutes – FX Empire

The Federal Reserve shook up the financial markets on Wednesday by not what they did, but what they didn’t do. The minutes from last month’s U.S. Federal Reserve meeting gave few clues about whether an even more dovish shift in its policy framework is possible in the autumn.

The news came as a disappointment to some U.S. Dollar bears, setting off a chain-reaction in the financial markets, led by a spike to the upside by the greenback. The surge in the dollar drove gold prices sharply lower while encouraging investors to also dump the Euro and the high-flying Australian Dollar. Meanwhile, the less-dovish minutes drove investors to lighten up on their speculative long positions in U.S. stocks.

Key Issue:  Average Inflation Target

Although most investors assumed the Fed minutes wouldn’t reveal too many secrets about future Fed policy, speculation has been rife the Fed will adopt an average inflation target, and seek to push inflation above 2% to make up for years it has run below, as part of a broader policy review, Reuters said.

But the minutes were vague on the issue and merely said, “a number” of Fed members thought it would be helpful to make a revised statement on its policy strategy at some point, without providing details or timing.

Gloomier Outlook for Economy

The minutes also sounded pretty gloomy about the U.S. economy and skeptical about capping government bond yields as a means of encouraging recovery and investment – leading to a modest sell-off in Treasuries.

Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the meeting summary said.

FOMC Members Concerned About General Growth

Because of how much impact the virus will have on the economy, FOMC members said they expect to hold the current overnight borrowing rate to a range of 0%-0.25% until they’re “confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals.”

New Worries About Risks to Financial System

Though Powell and other Fed officials repeatedly have said banks and related institutions are in generally strong shape, committee members at the meeting said they worried whether that might change if the virus spread persists and “more adverse” scenarios about the future take hold.

Officials Worried About Burgeoning Levels of Public Debt

The federal government is now $26.6 trillion in debt, gaining more than $3 trillion during the pandemic as Congress and the White House sped to get aid to those impacted by the economic shutdown.

That has coincided with a rush to market of Treasurys and is raising concerns that the high level of issuance “could have implications for market functioning.”

Finally …

The price action in the financial markets after the release of the minutes suggests investors may have been caught off-guard when the minutes showed little consensus by the FOMC to adopt an inflation-targeting regime, which is what so many may have been positioned for.

Furthermore, investors may have been hoping for more clarity from the Fed regarding key changes to policy that may take place at the September 18 meeting.

For a look at all of today’s economic events, check out our economic calendar.

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Dollar Zealand

New Zealand Dollar Forecast: Kiwi in Focus as RBNZ Decision Looms – DailyFX

NEW ZEALAND DOLLAR EYES RBNZ MEETING ON DECK: NZD/USD, NZD/JPY, AUD/NZD, EUR/NZD, GBP/NZD – LEVELS TO WATCH

  • New Zealand Dollar implied volatility pushes extremes ahead of the RBNZ decision due
  • NZD/USD price action is expected to be most volatile with an overnight IV reading of 22.3%
  • The RBNZ could weigh negatively on the Kiwi if the central bank jawbones the currency lower

The New Zealand Dollar could be due for heightened market activity on Wednesday. This is judging by NZD implied volatility readings, which are extremely elevated, as FX traders gear up for a scheduled monetary policy update from the Reserve Bank of New Zealand (RBNZ).

RBNZ INTEREST RATE DECISION DUE 12 AUGUST 2020 AT 02:00 GMT

New Zealand Dollar Price Chart RBNZ Rate Decision August 2src2src

Chart Source: DailyFX Economic Calendar

The RBNZ interest rate decision is due Wednesday, August 12 at 02:00 GMT and a press conference spearheaded by RBNZ Governor Adrian Orr will follow. Market consensus expects the RBNZ to keep its benchmark policy interest rate unchanged at 0.25%. That said, it is possible that the Reserve Bank of New Zealand takes the opportunity to try and jawbone the Kiwi lower as they did with their prior monetary policy press statement by detailing that “appreciation of New Zealand’s exchange rate has placed further pressure on export earnings.”

NZD PRICE OUTLOOK – NEW ZEALAND DOLLAR IMPLIED VOLATILITY TRADING RANGES (OVERNIGHT)

NZD Price Chart New Zealand Dollar Forecast NZDUSD NZDJPY AUDNZD EURNZD GBPNZD Trading Ranges

As one might expect around central bank meetings, there often is a material increase in the potential for currency volatility. The upcoming RBNZ decision provides a good example of this as New Zealand Dollar overnight implied volatility readings spike to extreme highs headed into Wednesday’s interest rate decision.

NZD/USD is anticipated to be the most volatile New Zealand Dollar currency pair during tomorrow’s trading session. This is judging by NZD/USD overnight implied volatility of 22.3%, which ranks in the top 97th percentile of measurements taken over the last 5-years, and is above its 20-day average implied volatility reading of 11.6%.

Correspondingly, spot NZD/USD price action is anticipated to fluctuate within a 154-pip trading range between 0.6504-0.6658 over the next 24-hours. Statistically speaking, this options-implied trading range of technical support and resistance is estimated to contain spot price action 68% of the time.

Keep Reading: NZD/USD Outlook Hinges on RBNZ Amid Failure to Test January High

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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Asian Dollar

Dollar up, Asian stocks slip as U.S. pins blame for virus on China – Reuters

SINGAPORE (Reuters) – The dollar inched higher, stock markets struggled for traction and oil dropped on Monday as a U.S.-China spat over the origin of the coronavirus put the brakes on optimism about an economic re-start as countries around the world ease restrictions.

FILE PHOTO: A man wearing protective face mask, following an outbreak of the coronavirus disease (COVID-19), walks in front of a stock quotation board outside a brokerage in Tokyo, Japan, March 10, 2020. REUTERS/Stoyan Nenov/File Photo

In thinned trade, with China and Japan on holiday, U.S. stock futures were last down 0.7%. FTSE futures fell 0.6% and European shares seemed set to return from a May Day break with a slump. EuroSTOXX 50 futures fell 3%.

U.S. crude snapped three sessions of gains with a 6% drop and the safe-haven U.S. dollar rallied to one-week highs against the risk sensitive Australian and New Zealand dollars.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.5%, pulled down by Hong Kong where the Hang Seng returned from a two-session holiday with its biggest drop in six weeks.

The moves extended a dour start in May which began on Friday with bleak U.S. data and the threat of fresh trade-war hostilities between the world’s two biggest economies.

U.S. President Donald Trump and Secretary of State Mike Pompeo added to worries with fresh efforts to pin blame for the pandemic on China, where the new coronavirus outbreak is believed to have originated.

The latest salvo came from Pompeo on Sunday who said there was “a significant amount of evidence” that the virus emerged from a laboratory in the central Chinese city of Wuhan.

Pompeo did not provide evidence, or dispute a U.S. intelligence conclusion that the virus was not man-made while an editorial in China’s Global Times said he was “bluffing,” calling on the United States to present the evidence.

But Pompeo’s comments double down on Washington’s pressure on China as U.S. deaths and economic damage mount.

An editorial in China’s Global Times said Pompeo did not have any evidence the virus came from the lab in Wuhan and that he was “bluffing,” calling on the United States to present the evidence.

“The risk of a pullback has increased this week,” said Chris Weston, head of research at Melbourne brokerage Pepperstone.

“The United States is not alone in publicly taking aim at China, but whether it’s Trump, Kudlow or Pompeo the narrative is more frequent, and traders are selling yuan,” he said.

With Chinese markets shut on the mainland, offshore yuan shot out to a six-week low of 7.1560 per dollar before clawing back to flat by mid-session.

The Australian dollar dropped below the 64-cent mark for the first time in a week, falling 0.5% to $0.6385.

Futures for benchmark U.S. 10-year Treasuries were unmoved at an implied yield of 0.50%, as demand for safe-haven assets was firm. Gold rose back to $1,700.00 per ounce.

BLAME GAME

An increase in tension between Washington and Beijing comes as the pandemic wallops the world economy.

Asia’s factory activity was ravaged in April, business surveys showed on Monday, and the outlook dimmed further as restrictions on movement to contain the coronavirus outbreak froze global production and slashed demand.

In the United States, manufacturing plunged to an 11-year low last month, consumer spending has collapsed and some 30.3 million Americans have filed claims for unemployment.

“Trump is looking to get re-elected,” said Nomura’s joint head of APAC equity research Jim McCafferty, likening his attacks on China to “Japan-bashing” by then-president Ronald Reagan in the 1980s.

“We’ve seen this before,” he said. “And I think as governments around the world become increasingly domestically focused…finding a villian elsewhere makes a lot of sense.”

That means a challenge for investors looking for income which seems to have, for now, stumped even billionaire Warren Buffett.

Buffett’s firm, Berkshire Hathaway, made an almost $50 billion loss in the first quarter, but ended it with a record cash pile and nothing to spend it on.

Buffett said he remains keen on making a big acquisition, but has not provided financial support to companies as he did during the 2008 financial crisis because he saw nothing attractive enough.

Elsewhere in currency markets, the safe-haven yen rose 0.2% to 106.72 per dollar while the euro, pound and New Zealand dollar slipped in trade considerably lightened by the “Golden Week” holiday in Japan, which runs until trade resumes on Thursday.

In commodity markets, U.S. crude futures recovered from early lows but were kept under pressure by worries about oil oversupply and crumbling demand, even as some U.S. states and cities start to ease coronavirus pandemic restrictions.

West Texas Intermediate crude futures last sat at $18.74 per barrel, down $1, while Brent futures were down 1%, or 27 cents, at $26.22.

The U.S. April jobs report will be released on Friday, but some analysts say it may not fully reflect how many people have been thrown out of work.

Editing by Kim Coghill and Jacqueline Wong

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