Overnight Headlines

*USD is surging this morning to ten-month highs on safe haven flows

*US stocks fell after the FOMC minutes showed tapering could happen this year

*EUR falls below 1.1704, lows of 1.1665, AUD and NZD to 2021 lows

*VIX jumps to its highest level in a month, above 21, oil to three-month lows

USD pared early gains after the FOMC minutes with the DXY printing a doji candle and closing on its previous four-month cycle highs. But dollar buying has been non-stop since Asia opened on weak risk sentiment. Flows and a push through stops and key levels seem to be the drivers. AUD and NZD were the worst hit majors yesterday on the RBNZ hold, albeit hawkish hold. But they are both making new lows today touching levels last seen in November 2020.

US equities extended losses for a second day with both the S&P500 and Dow falling over 1%. The Nasdaq fell for a third day with the VIX spiking higher above its 200-day moving average. This tells us how unsafe investors are feeling in the current bull market. Asian markets are slumping to their lowest levels this year, dragged down by the Hang Seng. European futures are catching up with the weak US session and lower by 0.5%, US futures mildly in the red.

Market Thoughts – Fed tiptoes to tapering

All eyes were on the FOMC minutes last night. They showed a split Fed, but one that recognises that we are much closer to tapering. Most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.” They expect “substantial further progress” to have been met by then, although the Delta variant is a concern. Officials concluded that they had attained their inflation goal while still needing progress on their employment mandate. That probably means one more solid job report as the bumper July figures came after this meeting.

The minutes do not seem to set up a taper as early as next month. But the timetable is well within the consensus on the Street. The next focal point is the Jackson Hole symposium next week. But a formal announcement is expected after this , potentially in September with actual tapering starting in December.

Chart of the Day – DXY new highs

We said yesterday how the dollar looked poised for more upside. Today has seen the move higher after a doji candle printed yesterday, as risk off hits markets. The FOMC minutes confirmed what we wrote with the Fed inflation target met and employment mandate close. We reiterate also about the fact that the economy is actually suffering from supply issues as opposed to any lack of demand. More Fed officials are now agreeing with this which could potentially lead to a much faster taper when it comes.

The dollar (DXY) has now breached the March top at 93.43 though this is not confirmed by a weekly close. It seems that the consolidation phase between 92 and 93 may now be over, depending on that close. The next leg higher will target the November high at 94.28 ahead of the September high of 94.74. We would have to lose 92.48 initially to indicate the DXY is not yet ready to head north.