FOMC Inflation Fears Drop USD, Commodity FX Gain On Metals Rally
- Commodities find two-way street as Copper/ Iron Ore gains, taking AUD with it while Oil slips
- FOMC Minutes show inflation concerns persist alongside fiscal policy doubts
- Hopes that ECB President Draghi would awaken Bulls at Jackson Hole fall flat
- Sentiment Highlight USD/CHF show traders disdain for USD, 60% increase in weekly shorts
While the US dollar remained stable ahead of the FOMC minutes, the focus at the earlier session trading was focused on Commodities. On one side, you had metals led by Copper and Zinc breaking higher. Many metals like Iron Ore are higher by ~30% since the beginning of summer. The strong demand for metals has been helped by a cut in supply from ‘rogue miners’ in China and has helped stabilize the market. OPEC must be jealous. Either way, we have seen the rise in Copper encourage traders to anticipate inflation and higher yields and provide support for the Australian Dollar, which will look to employment data on Thursday to help boost long bets and short covering further. One pair worth watching if the sentiment of risk assets remains supported is AUD/JPY.
Oil data looked encouraging on the surface, but in the end, Oil slipped as rising production showed that the current environment would likely not see any help from US E&P to reduce the global stockpiles of Oil while Shale is profitable at current levels. The most concerning parts of the weekly DoE inventory report was the build in gasoline inventories. Gasoline is a refined product from Crude Oil and a harbinger of demand, the mere 22,000 build in gasoline inventories at a time when refining activity in the US is at unsustainable record levels is helping to show that behind the scenes demand is only more likely to cool off from here. Looking forward, this helps to paint a picture where shale producers continue to produce aggressively, and even this week’s near 9M barrel draw in the US will not be enough to provide long-term support to the supply and demand picture for the energy market. The lead by metals provides a supportive outlook for metals relative to energy and could support AUD and emerging market currencies compared to weaker majors plus cross. From option action, the weaker currencies appear for now to be the haven currencies like CHF and JPY.
Another development from today’s trading was that the much-hyped Draghi speech at Jackson Hole might, in turn, be nothing to write home about. In short, reports surfaced on Wednesday that the Draghi would not provide details about any new steps of monetary policy. The hope ahead of today was that Draghi would introduce hawkish measures to be soon acted upon by the ECB. Such a disclosure would show the market that the ECB’s views on policy and the economic conditions of Europe were evolving, but alas, it appears we will need to wait for autumn as the ECB recently mentioned to get a better idea of their future plans.
Toward the end of Wednesday trading session, the Federal Reserve minutes from the July 25-26 meeting were released. The key point about the meeting notes worth grabbing was that while the Fed seems confident about commencing the balance sheet run-off (find out what this means here), concerns remain that inflation will pick up. Additionally, the fiscal (government-induced) policy progress in the US remains a concern as several participants see uncertainty about federal government policy, including fiscal policy, trade, taxes and health care, which could weight down firms spending and hiring plans. To add to that concern, President Trump disbanded his two advisory groups comprised of large cap CEOs after multiple departures in the wake of the violence in Charlottesville over the weekend.
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FX Closing Bell Top Chart: AUD/USD may be ready to resume uptrend as a breakout in metals continues
Chart Created by Tyler Yell, CMT
IG Client Sentiment Highlight: USD/CHF short positions increase ~60% WoW, upside favored
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at firstname.lastname@example.org.
USDCHF: Retail trader data shows 63.9% of traders are net-long with the ratio of traders long to short at 1.77 to 1. In fact, traders have remained net-long since Apr 21 when USDCHF traded near 1.00151; theprice has moved 2.7% lower since then. The number of traders net-long is 0.8% higher than yesterday and 5.3% higher from last week, while the number of traders net-short is 2.0% lower than yesterday and 62.9% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDCHF prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDCHF trading bias. (Emphasis added)
Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.