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Fed Liftoff Probability Falters

Inflation Concerns Intensify Prospect of Federal Reserve Postponing Rate Hike Until After September

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Yesterday’s FOMC Meeting Minutes showed that Federal Reserve remains data dependent in its thinking amid conflicting economic metrics which have clouded the outlook. The widely held view of the comments was dovish in nature as inflation remains a focal concern while slack in the labor market continues to diminish.

Rate Hike Uncertainty

Although some members of the FOMC voting board continue to call for an imminent rate hike, more members agree that conditions for a liftoff have not yet been met as disagreement reigns supreme at the Federal Reserve. The positivity of labor statistics was overshadowed by the softness in inflation and was cited as the main obstacle to raising rates sooner rather than later. While policymakers expect a rebound in energy prices in the second half of the year to eventually spur inflation, there are still substantial downside risks as evidenced by the downtick in the core inflation released earlier in the session. The probability of a September liftoff has now dropped below 50% as more participants see December as the earliest possible date for a rate hike. The kneejerk reaction to the news sent the dollar tumbling but USD has since recovered, notably retracing half the move against JPY.

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usdjpy08202015-1

Chinese Yuan Losses Spread

The move by the People’s Bank of China to revalue the Yuan has continued to cause casualties in the currency markets as Vietnam was forced to devalue the Dong for the third time in 2015. Kazahkstan’s Tenge was enabled to free float today, leading to a 23% plunge in the currency as panic spreads through emerging markets. Many analysts are beginning to draw parallels to the Asian currency crisis of the late 1990s as policymakers struggle to build confidence in regional markets and economic activity collapses. Chinese equity indices are trading firmly in the red as the Shanghai Composite approaches a critical support level at 3500 where intervention has occurred several times. Other emerging economies are facing similar crises with the Turkish Lira continuing to plunge to new lows while the Russian Ruble is also giving further ground against the US dollar, falling to levels last seen in February.

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usdrub08202015-2

Crude Crashes on Inventory Build

The pressure on commodities continues to intensify as the revaluation of the Chinese Yuan sends ripple effects through financial markets. Aside from copper crashing to the lowest since the last financial crisis, crude oil cascaded lower after the latest Department of Energy oil inventory numbers showed a surprising build. Stockpiles rose by an astounding 2.620 million barrels on expectations of a -0.777 million barrel drawdown. This coincides with the inventory build at the Cushing storage facility recorded earlier in the week which drove prices lower in the prior session. US oil output continued to fall, reaching 9.348 million barrels per day after dipping for 3 of the last 4 weeks. When combined with rising OPEC and non-OPEC production, oil prices hit their lowest levels since 2009 yesterday, with Brent and WTI each slumping over a point on the announcement. Prices continue to ebb near multi-year lows with Brent re-approaching levels seen in January.

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brnt-oct1508202015-3

Corn Equidistant Channel Technical Pattern

Stronger crop yields and a broader selloff in commodities have seen agricultural commodities trading mostly weaker in the last few weeks. Concerns about the state of the global economy coupled with growing fears of a protracted slowdown have seen a sharp unwind in certain product, notably corn futures which fell over $35 points in two hours on August 12th. Since then, prices have been slowly rebounding to the upside in spite of the deteriorating fundamental outlook and forecasts for better weather conditions. The equidistant channel pattern emerging in Corn futures has a bullish bias with ideal positions initiated at the lower channel line targeting the upper channel line. Any move below the lower channel line could indicate a channel-based breakout targeting further downside and a retest of recent lows in the agricultural commodity.

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corn-sep1508202015-4

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