A Short Note Before FOMC Minutes

The US dollar has stabilized against the euro, sterling and yen, where it has been confined to yesterday's trading range, awaiting the FOMC minutes from the July 30-31 meeting later today.  Against the dollar bloc and several of the beleaguered emerging markets currencies, like India, South Africa, Indonesia and Turkey, the greenback has extended its gains.  

A number of emerging markets are taking fresh initiatives to stem capital outflow.  Turkey hiked its overnight lending rate yesterday by 50 bp to 7.75% and announced additional (minor) tightening measures earlier today, such as doubling the size of the currency auctions (to $100 mln from $50 mln on days that its tightens conditions.  

In a similar vein, Brazil and India announced stepped up their bond buy-back efforts and Indonesia is preparing a package of measures that will be unveiled at the end of the week.  It appears Indonesian officials have bought some time as the rupiah stabilized in late turnover.    Pressure on the emerging market asset class remains, with the MSCI Emerging Market equity index off more than 0.5% today and EMBI+ is widening out by another 10-12 bp.  

It is less clear where the hot money is flowing today, as European bonds and stocks are lower and US Treasuries are little changed.  The news stream has been light.  There are two developments to note.  First, Japan has (finally) upgraded the crisis (to 3 on the international scale) with some 300 tons of radioactive water pouring back into the ocean every day.   Separately, Kuroda's comments that the BOJ can ease further if necessary does not break new ground and simply reiterates what he has said in the recent past, though some observers are latching on to it.  

Second, the UK CBI trends survey was stronger than expected, showing manufacturing orders at 2-year highs.  Export orders also rose (-7 from -20).  Separately, the UK reported some deterioration in its public finances.  Tax revenues are higher, as one would expected, given the stronger economic performance, but spending has increased faster.  In the first four months of the fiscal year, revenues are up 3.5%, while spending is up 4.3%.  For the fiscal year as a whole, the government projected a 3% increase in tax revenues and a 2.2% increase in spending.  

Sterling is firm and has not moved far from the $1.57 level.  The mid-June high near $1.5750 is the next immediate target. 

The main focus of the summer session is on the FOMC minutes.  Many are hoping for more insight into tapering plans.  No doubt it was discussed.  Recall, however, that many observers were disappointed that the statement issued after the meeting provide no fresh insight into the timetable. While the minutes will reflect the discussion, which includes non-voting members, the fact of the matter is that at the end of the discussion the Fed did nothing.   

The change that was made in the statement was the apparent upgrade of the risk of low inflation.  This succeeded in bringing Bullard back into the fold (majority).  Bullard had dissented in June due to what he regarded as not enough weight put on the fact that inflation was well below the Fed's target.   Ultimately, we suspect the take away message will be, as with the FOMC statement, more data is needed.  

If our assessment is correct, those looking for tapering tells will be disappointed (again) and this could weigh on the US dollar, at least initially, and may give some of the emerging market currencies a bit of a respite.  The thinness of the summer markets may make for some treacherous trading.