Article / 20 August 2015 at 2:02 GMT

Morning Report APAC: Dovish Fed lowers chance of September rate hike

APAC Sales Trading Desk / Saxo Capital Markets
  • FOMC minutes outlined conditions for policy firming had not yet been achieved
  • There was a very mixed session overnight in currencies following the dovish tone
  • Energy shares tumbled the most since January 

By Saxo APAC Sales Trading

Economic Data of the Day (Singapore Time)

  • 0200: EUR – Germany PPI MoM (Exp. 0.0%, Prev. 0.2%), YoY (Exp. -1.3%, Prev. -1.4%)
  • 0400: THB – Export Orders YoY (Exp. -4.2%, Prev. -5.8%) 
  • 0430: GBP – Retail Sales Ex Auto Fuel MoM (Exp. 0.2%, Prev. -0.2%), YoY (Exp. 4.1%, Prev.  
  • 4.2%) 
  • 0430: GBP – Retail Sales Incl. Auto Fuel MoM (Exp. 0.4%, Prev. -0.2%), YoY (Exp. 4.4%, Prev. 4.0%) 
  • 0830: USD – Initial Jobless Claims (Exp. 270k, Prev. 274k), Continuing Claims (Prev. 2273k) 
  • 1000: USD – Existing Home Sales MoM (Exp. -1.3%, Prev. 3.2%)


  • 0820: USD – Fed’s Narayana Kocherlakota Speaks at Bank of Korea Event
  • 0245: USD – Fed’s John Williams Speaks in Indonesia at Conference

Overnight News

We had FOMC minutes last night and read some dovish comments. There were concerns about achieving the target of 2% inflation, about low commodity prices, and about the risk of the USD being too strong. Here are some highlights from the Federal Reserve: 
  • Most judged that conditions for policy firming had not yet been achieved, but were approaching that point. 
  • Some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2% over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Fed for initiating a firming of policy. Members generally agreed that additional information on the outlook would be necessary before deciding to implement an increase in the target range. 
  • Some were more positive and "generally anticipated that inflation would rise gradually toward 2% as the labour market improved further and the transitory effects of earlier declines in energy and import prices dissipated”. 
  • While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the US economic outlook. 
  • Some were concerned that a move in rates “might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports”. 
  • The committee’s communications around the time of the first rate increase should emphasise that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions and should acknowledge that policy would continue to be accommodative. 
US CPI came in lower than expected MoM at 0.1% (Exp. 0.2%), YoY as expected at 0.2%, Core YoY as expected at 1.8%.

Foreign Exchange 

A very mixed session overnight in currencies with a more dovish than expected Fed that pushed rates lower, and the USD lower on expectation that the Fed will postpone its first rate hike. USDJPY moved lower on the back of that, EURUSD slightly higher, USDCHF dropped 1% but on the other hand oil prices continue to suffer with WTI trading at the low of 40.40 in NY and commodities currencies rallied: USDCAD is back up above 1.3100, USDBRL rallied 0.7% to 3.4924, USDMXN rallied 1.5%.

We believe that the commodity emerging-market currencies should continue to suffer in this environment with
lower oil prices and EM equities trading lower (check the EM ETF in our platform EEM:arcx. Our macro-analyst Kay Van-Petersen will write a piece on it soon). However, we could see some consolidation in the long USD position in the rest if the Fed decides to take its time before the first hike.

Volatilities didn’t react much yesterday after the FOMC minutes and actually traded lower. With the uncertainty surrounding the first rate hike, it will be good to consider buying some volatility in the 1M/2M area since they have come off decently in some currencies. USDCNH continues to calm down with 1w volatility down 0.6 from yesterday to 5.00.


After the more dovish-than-expected FOMC minutes yesterday, the 2yr note yields moved lower 6.1 bps to 0.657% and 10yr is down 6 bps to 2.12%. The market is now pricing 35% chance of a hike in September (55% earlier) and a 60% probability of a hike at the December meeting.



European markets closed sharply lower as investors were rattled by further volatility in Shanghai
stocks and a tumbling oil price. US equities had a volatile session before closing lower. Stocks briefly trimmed losses as Federal Reserve minutes showed policymakers judged conditions for higher rates haven’t been met yet, reducing speculation the central bank will raise rates in September. 

Energy shares tumbled the most since January as the unexpected increase in US crude stockpiles sent oil prices deeper into a bear market.

A September rate rise is less certain following the dovish tone from
the FOMC's minutes. Photo: iStock

-- Edited by Susan McDonald and Gayle Bryant

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