USD: Steady amidst ever changing political landscape - BBH

The US dollar had steadied after softening in the North American afternoon yesterday when the dissolution of President Trump's business councils as a series of executives stepped down, points out the analysis team at BBH.  

Key Quotes

“The FOMC minutes added more fuel to the move.”

“The market responded to the minutes by selling the dollar and buying US notes and bonds.  The narrative was the offered was that the market had seen in the minutes a reduced chance of another rate hike this year.”

“The place to test that hypothesis, however, is not the long-end, but the short-end.  The closest proxy is the December Fed funds contract.  The implied yield rose a single basis point, and at 1.21%, it is slightly higher than it was at the end of last week (1.195%).”

“In trading, a written confirmation is superior to a verbal confirmation.  When interpreting the Federal Reserve, a similar principle applies.  The minutes are an imperfect communication tool to guide expectations.  Voter and non-voter views are indistinguishable.  The passion and conviction are not easy to assess.  The record of a meeting from a few weeks ago is less significant than more recent comments by a person part of the Fed's leadership.”

“Simply put, in addition to the limited movement in the Fed funds futures contracts, Dudley trumps the minutes.  Dudley expressed what we assume is the leadership's view:  balance sheet announcement next month, and a relatively low bar to a rate hike in December. Moreover, as we have been pointing out, Fed officials have buffered their argument about rates by spending more time talking about financial conditions.  This is important:  "vulnerabilities associated with asset valuation pressures edged up from notable to elevated."