Commentators focus on 'patient' removal from Fed language and miss the big news, but the US dollar didn't - ASX futures up 27 points

After months of 'wishing' the US dollar down, it looks as though the US Federal Reserve manage to put a dampener on the trend last night by injecting some new language into their statement. While many remained focused on whether the "...the Committee judges that it can be patient" sentence with regard to normalising interest rates would be removed, the more important component was the introduction of a new paragraph. Using the trusty Fed statement tracker tool from WSJ, members can click here to see the changes in this morning's statement. You'll note a large green entry that includes, "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range."

While the Fed has room to interpret an "improvement in the labor market" as it likes, it will require some more objective evidence to be reasonably confident that US inflation will move back and maintain a stable 2% rate. The market will now focus even more intensely on actual and expected inflation rates in the US and this makes things interesting given the recent pricing of future inflation in bond markets. What is known as the 'break-even inflation rate' is an important metric to monitor, as it relates to the market of inflation-linked bonds (known in the US as TIPS), whereby the 'break-even' rate of inflation equals the equivalent maturity Treasury bond yield minus the equivalent maturity TIPS yield. This equation gives us an insight into what the market is predicting in future rates of inflation.

In today's first chart I have shown the 5-year, 5-year forward inflation expectation rate from the wonderful St Louis Fed website (a more complicated instrument than a regular TIPS bond as it is an interest rate swap beginning in five years with a maturity of five years), as this is one of the Fed's favourites as far as predicting longer-term inflation expectations. But don't over think it, just loosely assume that the US Federal Reserve will be conscious of this measure when determining their confidence in seeing relatively stable 2% inflation. You can see in this chart that the double-whammy of a stronger US dollar and falling crude oil prices had a marked effect on long-term inflation expectations last year, as they are both dis-inflationary pressures.

In the chart below, you can see the latest actual US inflation figures (provided by the US Bureau of Labor Statistics), showing while the red line (all items excluding food and energy) has remained afloat, the blue line (includes food and energy) has fallen dramatically.
This tells us that the future of US interest rates and thus the strength of the US dollar (which, in turn, will effect the level of the euro, the level of the Aussie dollar, influence commodity prices, influence US equities etc.) has a hell of a lot to do with the oil price. So further to today's first Rivkin Trader chart (US dollar index in orange, EURUSD in black), I've shown the long-term price of WTI crude oil in the second chart. Just when the world got used to US$100 per barrel oil up until mid-2014 and the commensurate uplift in the prices of energy and its buoying effect on consumer inflation, the rug was pulled out from under all of these assumptions last year with the fall of crude. I think last night was the first piece of evidence that the market is finally waking up to the fact that a hiking cycle, let alone a single hike, makes absolutely no sense and the Fed may just get more vague about their intentions to wiggle out of the positions whereby the market has come to expect a hike. Rivkin and our buddies at Saxo have been saying this for a while, but the market for the US dollar has taken a while to react. I won't get too ahead of myself, the US dollar could turn around and trend again, but keep an eye on the oil price - I think that will be the catalyst.

Today's last chart shows the tick-up in the Australian dollar following the US dollar index weakness.

Today‚Äôs charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to open a Rivkin Trader account now.

Upcoming economic announcements:NZ GDP has just came in at 3.5% versus 3.4% expected (gotta love NZ right now), Swiss rate decision at 7:30pm, US initial jobless claims at 11:30pm, all Sydney time.

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