Stay short on crude oil, long EURUSD on dovish FOMC Minutes

The Day So Far

Markets responded positively to the FOMC minutes from the October meeting, but not so much because it increased the probability of a rate hike at the December meeting, which markets now expect, but the cautious nature of the discussion offered re-assurance that the pace of hikes thereafter will likely to be very gradual indeed. Repeated focus on ‘data dependence’ and the downside risks to inflation suggest that the trajectory of rate increases should be the main focus of markets rather than the timing of the first hike. The S&P stormed back above the 200 DMA and continued overnight to within 1% of the 2100 handle, while the Dollar Index eased away from the crucial resistance at 100. Elsewhere on the central banking front, the BOJ held fire again on further easing despite the Japanese economy falling back into recession and the persistence of deflation. These two events have caused the yen to appreciate sharply against the dollar in the past 24 hours, USD/JPY easing back from 12375 down to the 12300 handle.

The major data of the morning saw UK Retail Sales missing on both ex-Auto and the headline, causing sterling to briefly fall back to the pre-FOMC highs before retracing strongly as the dovish minutes continued to dominate sentiment.

The Afternoon View

With markets having pushed up so significantly in the past 24 hours, we are looking for the conservative long in S&P from pivot, going with the bullish trend for now. Elsewhere, we remain short crude despite evidence that the vast majority of the selling in that commodity has now been done and a choppier market awaits in the run-up to the OPEC meeting early next month. $40 looks to be a solid level for the bulls to cling to for now. Long euro versus the dollar, believing that the dovish tone to yesterday’s FOMC minutes will finally give rise to a bit of a rally in the short-term for the euro; we had come just over 100 pips from the lows of the year so bounce is likely in that currency pair before the December meetings for the ECB and the FOMC, meetings in which the divergence in monetary policy is likely to be exacerbated. Finally, we are long t notes, f or similar reasons to the euro trade, albeit with a conservative entry at yesterday’s post-FOMC lows just above S1. Initial Jobless and the Phili Fed Business Outlook are the highlights of a quiet-looking calendar.

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