If the November FOMC event failed to convincingly signal a dovish shift, the minutes of that meeting – released yesterday – were surely more effective in that direction. There are two key points in the minutes that markets are interpreting as dovish statements:
1. “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate”.
2. “Various participants noted that the assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee's goals was somewhat higher than they had previously expected”.
Point one simply indicates that there is a larger-than-expected (“substantial”) majority of the Committee that is backing a slower pace of tightening. In point two, markets may have focused on the term “various”, which indicates a rather vague consensus backing Chair Jerome Powell’s post-meeting “higher-for-longer” statement. The market reaction has been quite straightforward: risk-on, dollar-off. Fed funds futures are currently embedding a peak rate at 5.0%, but it might prove harder to see further re-pricing higher in rate expectations after the dovish minutes. US markets are closed for Thanksgiving today, and will be open for only half a day tomorrow. There are no data releases or Fed speakers until Monday. Expect a significant drop in liquidity into the weekend.
The CAD is a relative under-performer on the session. Soft oil prices may be weighing on CAD sentiment however, the fundamental backdrop remains a bit more supportive, however, with data suggesting the economy retains a bit more momentum than might have been expected after a series of rate hikes. This may mean the BoC may hike rates a little more aggressively at the Dec 7th policy decision. Due to the Thanksgiving holiday in the US today, expect low liquidity levels in the FX market today. Observe the USD/CAD trends.
European currencies are enjoying a strong rally, as lower energy prices and higher-than-expected PMIs yesterday had already offered some support to European sentiment before the Fed delivered some dovish minutes. We remain doubtful that it will be a smooth ride to recovery for European currencies, and most continue to see upside risks for energy prices into the new year despite recent developments. EUR/USD has broken above 1.0400 and may extend its rally to 1.0500/1.0550 in the near term, but we suspect the bullish trend may start to run out of steam as we approach year-end. A return towards parity remains a strong base case for December.