Bank of America / Merrill Lynch on the FOMC Minutes and move in the US dollar
Fed officials eye December liftoff. The October FOMC minutes covered a wide-range of views among the Committee, with arguably a few more dovish comments than the market anticipated. Nonetheless, "most" Fed officials thought the conditions to hike "could well be met by the next meeting." Specifically, the cumulative improvement in the labor market and reduction in global risks should give many FOMC voters great confidence in the outlook. That said, it was notable that "most" voters still were not yet reasonably confident on their inflation outlook. The Fed remains data dependent; our expectation remains that conditions should allow the FOMC to hike come the December meeting.
FX: Don't be fooled by dollar decline. The dollar's modest weakness post-minutes reflected positioning (as we expected). The market had increased the chance of a December hike to over 80% and the USD had rallied broadly since the October FOMC. During this time we also had a blockbuster payrolls report, and a range of Fed speakers communicating their openness to a December hike.
As such, all this rendered today's minutes a bit dated, but given the sharp increase in USD longs, some of the dovish elements discussed above may have spooked a few. However, the minutes were balanced in our view, and given they suggest the core of the FOMC see December as likely assuming data come in line, are still USD-supportive.
That said, outside of against CHF, JPY, and GBP, the USD is pretty fairly priced relative 2Y rate differentials. Thus today's minutes are unlikely to push the dollar meaningfully higher. For a more significant USD rally from here, we need another catalyst. The clear one is the November payrolls report on Dec 4th and ECB meeting the day before. Until then we could see the USD in consolidation mode.
