The biggest surprise of the last trading week came from an unlikely source as the minutes from the April 27 Federal Open Market Committee (FOMC) meeting were published. The notes are published three weeks after the release of the statement and many say it is an outdated practice as a lot can happen in those three weeks making the statements not relevant. The actual April statement was neutral while oversea risks were omitted there were concerns for an apparent slowdown in the U.S. economy. Since there was no press conference in April, investors had to wait to know what policy markers discussed. The notes provided a hawkish element lacking from the statement and has the USD surging after a June rate, while not guaranteed, is now back in play.
The Bank of Canada (BoC) will announce its interest rate statement on Wednesday, May 25 at 10:00 am EDT. There are no changes expected but the BoC is anticipated to downplay growth expectations for the second quarter given the impact of the Alberta wild fires on GDP. A Reuters survey of economists see the next move by Governor Poloz is to raise rates next year, rather than cut them in 2016. The BoC cut rates twice in 2015 and so far has refrained from easing awaiting the effects of the fiscal stimulus announced in March.
The FOMC minutes have put fundamentals back in play after the Fed’s cautious stance seemed to ignore economic indicators. The economic calendar is not too busy for the dollar. The U.S. durable goods on Thursday, May 26 at 8:30 am EST and the second estimate of the first quarter GDP on Friday, May 27 at 8:30 am are the two highlights in a week that also includes new home sales, goods trade balance and pending home sales. Strong numbers will boost the USD as a June rate hike is now back on the table, and vice versa soft data will deflate the dollar rally as the possibility of a rate hike in June erodes.
The EUR/USD lost 0.81 percent in the week of May 16 to 20. The pair is trading at 1.1206 after the USD is losing some of the momentum from the FOMC meeting minutes. The U.S. surged after the notes from American policy makers reintroduced the June FOMC meeting as a possibility to hike rates if the economy improves. The three week period between the FOMC statement and the release of the notes has seen just that. Improvements in employment are nothing new, but consumer spending and inflation could swing the balance on a year that was supposed to see 3 to 4 rates hikes, and was quickly downgraded to a couple.
The gap between what the Fed says and what the Fed does is shrinking and that is the biggest contribution from the minutes form the April meeting. Fed members Kaplan and Lockhart both said this week that a rate hike would be appropriate in the short term. Lockhart also mentioned that the presidential election is not a pic that comes up at FOMC meetings. That might be the case, but it will also be that non committal tone that leaves September out of the picture as the Fed will want to avoid appearing to show any bias to either party so close to the elections.
Core durable goods in the U.S. disappointed last month with a surprise fall of 0.2 percent when a gain of 0.6 percent was forecasted. Durable goods gained by less than expected with 0.8 percent growth instead of the anticipated 1.9 percent after the surprise loss of 3 percent in February. Slow sales of auto and computers have reduced the pace of higher ticket items. This month has shown a turnaround for some metrics with consumer spending being a notable mention. It remains to be seen if some of the retail sales bump will also show up in durable good sales.
Forex Market events to watch this week:
Monday, May 23
11:05pm AUD RBA Gov Stevens Speaks
Tuesday, May 24
5:00am EUR German ZEW Economic Sentiment
6:45pm NZD Trade Balance
Wednesday, May 25
4:00am EUR German Ifo Business Climate
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
9:30pm AUD Private Capital Expenditure q/q
10:00pm NZD Annual Budget Release
Thursday, May 26
4:30am GBP Second Estimate GDP q/q
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, May 27
8:30am USD Prelim GDP q/q