In hours the Minutes will print
Perhaps they will give us a hint
Of when the Fed’s caper
The now famous taper
Will help them to slow down the Mint

The dollar continues to perform well against the Emerging market set, but is rallying against its G10 brethren as well this morning. Pretty much everything you read today prefaces some point with “…before the Fed minutes are released.” I don’t know that I can ever remember the Minutes being so anxiously awaited. The question is whether they will be that meaningful. I mean the release this afternoon has taken on almost mythical significance. I have a feeling we could all be very disappointed as they won’t actually reveal the starting date. I think we already know everything; that the Fed is watching the data closely and if the numbers continue to show their recent slow improvement, the Fed will slow down its rate of purchases. How will that disappointment play out? My guess is the initial move will be a dollar sell-off and equity rally. But ultimately, it remains clear the Fed is strongly considering a reduction of QE and so the dollar will eventually benefit further, likely even before the end of the session.

Perhaps just as interesting to FX markets has been the story from Germany where FinMin Wolfgang Schaeuble admitted yesterday that the Eurozone would have to resort to the “further measures and assistance” for Greece that were agreed last November. Cutting through the euphemisms, he is saying that Greece is going to benefit from either having loans forgiven or receive direct aid. As I have written consistently for the past 3 years, Greece is broke and there is nothing that the country can ever do to repay the current debt outstanding. They have already forced the private sector to take its haircuts and now most Greek debt is owned by the public sector. Thus, Schaeuble is starting to pave the way for the public sector to actually pay the freight. Now he and Merkel want to prevent any problems ahead of the German election in about 5 weeks, but there is no doubt that within a relatively short time after the election, we will awaken to a story about the Eurozone writing down debt or putting up straight aid, not loans. This highlights the ongoing problems for the euro, and remains one of the key reasons that I find it difficult to see a significant rally. However, I respect the flow story and the ongoing changes in the balance sheets of the Fed and the ECB continue to be a key support for the single currency.

In the UK, we saw modestly weaker data with the PSNB falling a smaller than expected £1.6 Billion indicating that the recent better than expected UK data has not yet led to an increase in tax revenues. But the market didn’t seem to care much as the pound is essentially unchanged this morning. The other stories about the pound are of the Mark Carney variety, with more analysis on the newly invoked BOE guidance efforts. While guidance had been modestly successful for the Fed, I believe that markets are becoming wise to the idea that guidance is an effort by the central banks to NOT do something, and as I wrote yesterday, markets are pining for action not words. I believe that we will continue to see markets push hard to force central banks to act, and will punish either government debt markets or currencies or both if guidance is all that they see. In this case, I actually think the pound has room to rally further because the BOE guidance has been an effort to continue low rates without spending any resources. One of the natural outcomes would be a weaker pound, something welcomed by the British manufacturing community. So a stronger pound would be the market response to force the issue.

In the commodity space, both CAD and AUD have traded lower, with CAD back at its lowest levels in a month. This seems to be a combination of general USD strength, combined with some softness in commodities and somewhat weaker minor data released yesterday. The options community seems to be focused on 1.0450, but the big psychological level will be 1.0500. While we did spend some time above that level back in June, it has represented a pretty strong resistance level during the past several years. Unless the Fed spells out a taper timeline, I think we fail at that level for now.

USDINR traded to yet another historic high overnight, falling some 1.2% as the RBI has proven incapable of convincing anyone that they can manage the situation. My big concern is that we are at the beginning of a legitimate currency crisis there and that we are going to see an imposition of restrictions and other measures as capital flees the country as quickly as it can. Who knows, maybe it will force the politicians to act, which is desperately needed, but of that I’m not confident. At the same time BRL has stabilized for the moment, seemingly finding a short term home around 2.40. While I continue to look for further depreciation in the Real, it will probably be a few sessions before that starts again. Across the rest of the space, most currencies are suffering this morning as well, but that is part of the general market activity rather than country specific news.

Later this morning we will see Existing Home Sales (exp 5.15M) but nobody really cares about anything except the Fed Minutes at 2pm. Equity futures are soft right now, but don’t look for anything until the Minutes are released.

Good luck
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