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The latest North Korean missile test and hostile words from the US in reaction raise the risk of a destabilizing surprise. The Swiss franc was the top performer Wednesday while the Canadian dollar lagged but the magnitude of the moves was small. Australian trade balance is up next. A new Premium trade has been issued with 4 supporting charts backing the trade.

United States ambassador to the UN Nikki Haley had strong words for North Korea on Wednesday. She said the latest missile test was a sharp escalation and that the US will use its military if it must and could go its own path.

Markets largely ignored the rhetoric but it's a clear escalation. US leaders are also increasingly pointing the finger at China as the enabler of North Korea. The latest tweet from Trump noted that trade between the countries grew 40% in Q1. 'So much for China working with us,' he wrote.

We don't think words – even harsher words – will rattle markets but the moment any actions are taken it will be a game changer. China has said that military must not be an option but if the US puts it in play it would threaten to rollback China-US relations and plunge South Korea into war. It would be a sharp retrenchment in risk assets and a flight to bonds.

In separate news, the FOMC minutes highlighted messages the Fed had already sent. Namely that most officials don't believe that the latest downtick in inflation is real or long-lasting. On bond purchases, they are undecided about whether to start the run-off in September or later.

Looking towards Asia-Pacific trading, the lone data point to watch is the 0130 GMT release of Australian trade balance for May. A surplus of A$1 billion is expected after a $555m surplus in April.

As expected, not much new in the FOMC minutes from the June meeting, as Yellen was quite clear during the press conference after the policy announcement and most FOMC members have expressed their views in speeches and/or interviews afterwards.

The most interesting part of the minutes was about the timing of the balance sheet run-off, as 'several preferred to announce a start to the process within a couple of months', if the economy evolves as expected. 'Some' want to wait until later in the year. Overall, it supports our view that the Fed can make an announcement in September and start actual run-off in Q4. Although the Fed recognises that the size of the balance sheet must be higher now than pre-crisis, as demand for central bank reserves has increased due to increasing financial regulation (see Research US: Fed's regulatory hurdle for starting quantitative tightening, 13 March), the risk remains that the Fed is too optimistic about how much it can shrink the balance sheet. That said, we still do not know what level of the balance sheet the Fed aims at.

With respect to inflation, the minutes say low inflation is likely 'transitory', in line with what Fed Chair Yellen said at the press conference. Fed still has faith in the Phillips curve, which says that the tighter labour market should push up wage growth eventually. The problem is that tightness of the labour market is not the only factor determining wage growth, as second-round effects from the many years with inflation below 2% have hit wage growth. When employees expect to remain low, they can live with low wage growth, as real wage growth may still be solid, see also Strategy: Central banks consider leaving the party, 30 June.

We expect the Fed to hike one more time this year in December due to the focus on the unemployment rate and easy financial conditions. Note, though, that four FOMC members signalled no further hikes this year in the updated projections in connection with the June meeting. By skipping September, the Fed can also get some more clarification about whether the low inflation prints in recent months were temporary or not. Instead, we expect an announcement on the balance sheet in September as written in the second bullet. We still think risks are skewed towards the Fed pausing its hiking cycle next year,

No shortage of drivers leading to very aggressive price action overnight with US traders eager to re-engage after the holiday break.

Oil prices tanked with WTI plummeting from the $47 level to $45. However, we did see a significant bounce at the close with API data coming in a bit better than anticipated. No specific catalyst for the aggressive move lower but likely down to traders eager to re-engage post-holiday views with stop losses likely feeding the frenzy on the break of $46.level.

The FOMC minutes were perceived hawkish with US yields moving higher and USDJPY following suit. The Fed's verbal gymnastic surrounding inflation was rather pragmatic attributing the inflationary soft patch on idiosyncratic factors. They also made a note of systemic financial risk from elevated asset prices which supports the case for rate hike without data dependence. But with no consensus on the balance sheet runoff timing, investors USD appetite dwindled a touch heading into the Asia Trade However, the Feds acknowledgement to elevated asset prices will likely keep the dollar bears at bay as this view provides more fodder to the rate hike narrative.

Anticipating a reduction in short dollar positions after the hawkish FOMC minutes and as traders flatten out heading into Friday's NFP No risk reward on coin flips as there will be plenty of opportunities to express views post data

EURO

ECB member Coeuré's dovish comments have been weighing on investors sentiment as the EUR struggles to gain any traction above 1.1350. Coeuré's lean does question the current ECB hawkish narrative the markets have been running with, but he's likely doing little more than tapping the markets brakes after it's overzealous read on Draghi's Sintra comments when EU equities cratered.

Canadian Dollar

CAD predictably took its lumps as oil prices came off in early NY trade and continued to wobble at the beginning of Asia trading above 1.2960 level as US dollar remains firm in early trade. But with the BoC's July meeting next week and Governor Poloz confirming his hawkish view entering the official blackout ( no comment) period which begins on the week before the formal policy announcement it shouldn't run too far off course. But the oil price storyline and positions squaring remains the wild card factor in the absence of central bank guidance.

Australian Dollar

Weaker oil and a slightly stronger USD in early Asia has dented Aussie sentiment.However, it remains tentatively bid on dips despite the RBA failing to live up to the markets hawkish lean. While commodity currencies lead by USDCAD staying in favour and providing support for the Aussie the shifting oil price narrative does raise concerns.

Japanese Yen

The USDJPY is entirely correlated to moves on US fixed income but worth noting 30-year JGB's are trading at the highest level since late Feb

The Canadian dollar depreciated on Wednesday versus the US dollar. The publication of the Federal Open Market Committee (FOMC) meeting two weeks after the Fed announced it was hiking rates gave the dollar some breathing room and helped the greenback recover from some of the weekly losses versus other major pairs.

Oil prices fell more than 4 percent ahead of the release of US crude inventories tomorrow at 11:00 am EDT. The price of energy had stringed together 8 winning sessions but that all came to an end with a stronger USD and reports of Organization of the Petroleum Exporting Countries (OPEC) production rising. The OPEC production cut deal with other producers has led to stability on oil prices, but the impact has been subdued thanks to the increase in US production. If OPEC members Nigeria and Libya who are exempt from the terms of the agreement are increasing output to recover from earlier disruptions.

The Canadian economic calendar was light on Wednesday with traders looking ahead to tomorrow's trade balance and building permits both to be released at 8:30 am EDT. The Canadian indicators could get lost in the shuffle with the start of the US employment data deluge. The ADP non-farm report at 8:15 am EDT and unemployment claims at 8:30 am EDT. Non manufacturing PMI in the US will be published at 10:00 am EDT and the Energy Information Administration (EIA) will release the weekly crude inventories at 11:00 am EDT.

The USD/CAD gained 0.264 percent in the last 24 hours. The currency pair is trading at 1.2972 after the Fed meeting minutes highlighted the central bank's commitment to keep tightening monetary policy. The loonie lost on a daily basis, but continues to be ahead of the USD in the last five days. The hawkish rhetoric from the Bank of Canada (BoC) put a rate move in July as a definite possibility taking the USD/CAD pair below the 1.30 price level. How much lower the pair can go depends on US employment with private payrolls due on Thursday and then the biggest indicator in the market the U.S. non farm payrolls (NFP) to be delivered on Friday, July 8 at 8:30 am EDT.

The Fed FOMC minutes did not shed any new light on the topics under discussion within the central bank. Fed speakers have been divided on the issues of inflation and the interest rate hike path which were highlighted in the notes from the last monetary policy meeting. The vote on that meeting was for the second rate hike in 2017. There is also now more details on the Fed's plans for its reduction of the balance sheet it accumulated during the lifespan of the quantitative easing program. The only question mark that remains is when will it start to shrink. The takeaway from the FOMC minutes is "within months" which leaves both the September and December FOMC meetings as heavy candidates. If the Fed decides to hike rates for a final time in 2017 it could decide either to split the announcements between the two meetings with September being the kickoff of balance sheet reduction and December reserved for a rate hike announcement.

CAD traders will be on the lookout for employment releases out of the US as the dollar found little support from the Fed minutes, but could turn around if the inflation component of the private and public job reports show signs of wage growth. Canadian jobs are expected to have risen by more than 11,000 positions following the massive gain of 54,500 last month and could support the CAD against the USD ahead of the Bank of Canada (BoC) monetary policy meeting on July 12.

Oil dropped 4.226 percent on Wednesday. The price of West Texas Intermediate is trading at $44.94 ahead of Thursday's release of crude inventory data. The price of oil has been caught between the OPEC cut agreement and ramping production from other producers. Russia signed on to the OPEC deal but according to some officials they will not push for deeper cuts in the upcoming meeting. US producers have slowed down the number of oil rigs that are back online, but as price stays or rises from current levels the ramp up will continue putting pressure on the OPEC leadership.

The weekly API oil inventories showed a large drawdown of 5.8 million barrels of crude and -5.7 million barrels of gasoline with a small buildup of 0.4 in distillates giving a late Wednesday session boost to crude ahead of the government's official data to be released tomorrow at 11:00 am EDT.

Market events to watch this week:

Thursday, July 6

• 8:15 am USD ADP Non-Farm Employment Change
• 8:30 am CAD Trade Balance
• 8:30 am USD Unemployment Claims
• 10:00 am USD ISM Non-Manufacturing PMI
• 11:00 am USD Crude Oil Inventories

Friday, July 7

• 4:30 am GBP Manufacturing Production m/m
• 8:30 am CAD Employment Change
• 8:30 am CAD Unemployment Rate
• 8:30 am USD Average Hourly Earnings m/m
• 8:30 am USD Non-Farm Employment Change

*All times EDT

The FOMC minutes for the June meeting unveiled that members were divided over the timing of balance sheet reduction while there was also discussion over the recent inflation weakness. At the meeting, the Fed raised its policy rate, by +25 bps, to a target range of 1-1.25%.Given the fact that the economic and medium-term inflation outlooks was largely unchanged since May, members generally judged that it was appropriate to adopt the continued removal of monetary policy accommodation. The rate hike decision was not unanimous. Minneapolis Fed president Neel Kashkari dissented as he preferred to keep the policy rate unchanged until inflation was "actually moving toward the 2% longer-run objective". Meanwhile, "a few" members who voted in favor of a rate hike in June indicated that "they were less comfortable with the degree of additional policy tightening through the end of 2018 implied by the June SEP median federal funds rate projections" (i.e. three rate hike as suggested at the June SEP). These participants noted that "such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to +2%".

The minutes reflected the division among members regarding the timing of balance sheet reduction as well as how it would affect the path of interest rate hike. While "several preferred to announce a start to the process within a couple of months", "some others emphasized that deferring the decision until later in the year would permit additional time to assess the outlook for economic activity and inflation". Concerning the interaction with the monetary policy, the minutes revealed that "several participants indicated that the reduction in policy accommodation arising from the commencement of balance sheet normalization was one basis for believing that, if economic conditions evolved broadly as anticipated, the target range for the federal funds rate would follow a less steep path than it otherwise would". Yet, "some other participants suggested that they did not see the balance sheet normalization program as a factor likely to figure heavily in decisions about the target range for the federal funds rate". Some members holding the latter view "judged that the degree of additional policy firming that would result from the balance sheet normalization program was modest".

The members also debated over the appropriate response to the tightening employment market. The minutes revealed that "several participants endorsed a policy approach" where the employment market would fall below the estimated NAIRU for a sustained period, while some others "expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation".

Recently, both headline and core readings of inflation came in lower-than-expected. Regarding this, most members viewed the weakness as "largely reflecting idiosyncratic factors, including sharp declines in prices of wireless telephone services and prescription drugs. They expected these developments as transitory and having "little bearing on inflation over the medium run". The members retained the view that, as "the effects of transitory factors waned and labor market conditions strengthened further, inflation would stabilize around the Committee's +2% objective over the medium term". Yet, "several" members raised concerns that progress toward the Committee's +2% longer-run inflation objective might have "slowed and that the recent softness in inflation might persist". They believed that limited upward pressure on inflation from resource utilization might have been a reason causing the softness. There were also "a couple" of members raising the concern that "a tighter relationship between inflation and resource utilization could reemerge if the unemployment rate ran significantly below its longer-run normal level, which could result in inflation running persistently above the Committee's +2% objective".

The minutes unveiled that the Fed still lacked consensus over the balance sheet reduction schedule. Therefore, it would be very unlikely to begin in September though some members suggested it could begin in as soon as a few months. Should the economic activities and the job market maintain the current pace of improvement, we maintain the view that the Fed would announce a more detailed plan (schedule and mechanism, etc.) on balance sheet reduction in September while a +25 bps rate hike would be adopted in December.

The minutes from the June meeting where it opted to raise rates a quarter point showed that Federal Open Market Committee participants generally saw the outlook for economic activity and the medium-term outlook for inflation as little changed since May. Therefore, it viewed a continued removal of monetary policy accommodation as being appropriate.

In light of surprisingly low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. Most participants viewed the recent softness in price data as largely reflecting idiosyncratic factors including sharp price declines for wireless phone services and prescription drugs. As these transitory impacts wane and the labor market strengthens further, participants expect that inflation would stabilize around the Committee's 2% objective over the medium term.

Unsurprisingly, views on inflation were mixed. "Several" participants pointed to recent increases in import prices as consistent with inflation stabilizing around 2% over the medium term. While "several" others expressed concern that progress towards the 2% objective has slowed, and that the recent softness in inflation might persist. But, overall near-term risks to the economic outlook were viewed as roughly balanced, and that the Committee should continue to monitor inflation developments closely.

One member (likely Kashkari, who dissented on the rate hike) did prefer to keep the fed funds rate unchanged until inflation was actually moving toward the 2% longer-run objective. Also, a few participants who supported the increase in the funds rate in June indicated they were less comfortable with the degree of additional tightening in 2018 (currently 3 hikes in June's SEP), worried that it is inconsistent with a sustained return to the 2% inflation target.

On the plus side, a number of participants cited that improved prospects for foreign economic growth meant risks to the U.S. economic outlook from overseas had diminished in the intermeeting period. Moreover, job gains were viewed as having moderated, but had been solid on average, household spending had picked up, and business fixed investment had continued to expand.

On business investment, contacts in many districts remained optimistic about business prospects, supported in part by improved global conditions. However, that optimism appears to have abated somewhat in part due to diminished prospects for fiscal stimulus. Notably some large firms had curtailed capital spending due to uncertainty about changes in fiscal policy.

The Committee expected to begin implementing its balance sheet normalization plan in 2017, but there were a range of views on exact timing. Several participants preferred to announce the start of reducing reinvestments within a couple of months (meaning the July or September meeting), while others preferred to wait until later in the year in order to assess the economic outlook and inflation developments.

The Fed had outlined its plan to gradually reduce its holdings by tapering reinvestments in its Treasury and MBS portfolio in June along with its statement. The Fed expects to cap runoff at $10 billion per month initially ($6bn for UST/$4bn for MBS) before raising it to $50bn per month within a year, with the same 60/40 split between UST and MBS. The implications of this are discussed in TD's recent report.

Key Implications

For now the consensus view among FOMC participants is that while near-term inflation would remain somewhat below 2% due to idiosyncratic factors, the economic outlook for moderate growth and labor market tightening is expected to see it stabilize around the 2% objective over the medium term. However, it is clear three months of soft inflation readings have members concerned, with some questioning whether three quarter point hikes in 2018 are necessary given weakness in the recent data. As outlined in our latest forecast, the risks are skewed to two hikes in 2018, rather than our baseline expectation of three.

The minutes didn't clear up the precise timing on when in 2017 the Fed would start adjusting its reinvestment policy, with members divided on the precise timing. However, with only half a year left the possible options are limited. TD Economics expects that as long as the economy progresses as expected, the Fed is likely to start the process in the fall, and then raise rates another quarter point in December.

GBP/USD has recorded small losses in the Wednesday session. In North American trade, the pair is trading at 1.2920. On the release front, British Services PMI posted a reading of 53.4, shy of the forecast of 53.6. Later in the day, the Federal Reserve releases the minutes of its June policy meeting. On Thursday, the US releases three key indicators – ADP Nonfarm Payrolls, unemployment claims, and the ISM Non-Manufacturing PMI.

This week's British PMI reports are raising concerns, as all three PMIs pointed to slower growth in June. The PMIs gauge the strength in the manufacturing, construction and services sectors, and all three reports pointed to expansion, but at a weaker pace than in May. The double whammy of the British election and the start of Brexit talks with Europe have increased uncertainty and resulted in a decrease in new orders across the economy, has underscored by the softer PMI readings. Weaker economic conditions will compound the difficult situation of the BoE with regard to interest rate policy – the economy may not be ready for a rate hike, but inflation, which is running at a 3% clip, is also hurting the economy and is above the BoE's target of 2%. BoE policymakers have not hesitated to air their differences in public, with BoE Governor Mark Carney at odds with MPC member Ande Haldane at others regarding raising rates. Just a few weeks ago, Carney appeared adamantly opposed to raising rates, but he has since softened his approach, and this triggered a strong pound rally last week, as the currency briefly punched above the 1.30 level.

The Federal Reserve will be back in the spotlight on Wednesday, with the release of the minutes from the June meeting. Federal Reserve policymakers have consistently projected one final rate hike in 2017, but the markets remain skeptical. The odds of a December rate hike are pegged at only 50%, while the likelihood of an increase in September is just 18%. The US economy slowed down in the first quarter, and there are signs that Q2 will also be soft. Consumer spending, which comprises two-thirds of US economic growth, remains soft. Another sore point in the economy is inflation, which remains below the Fed's target of 2%. In June, Fed Chair Janet Yellen shrugged off inflation worries, saying that she expected inflation to remain soft due to temporary factors. The dollar was broadly higher after the June rate statement, as Fed policymakers were surprisingly upbeat about the economy and dismissed concerns about low inflation levels. Traders should keep a close eye on the minutes, which could be a market-mover. Will the Fed minutes present a positive view of the US economy? If yes, the dollar could respond with gains.

USD/JPY has posted gains on Wednesday. In the North American session, the pair is trading at 113.20. On the release front, US Factory Orders declined 0.8%, missing the forecast of -0.5%. Later in the day, the Federal Reserve releases the minutes of its June policy meeting. There are no major Japanese events on the schedule. On Thursday, the US releases three key indicators – ADP Nonfarm Payrolls, unemployment claims, and the ISM Non-Manufacturing PMI.

Bank of Japan policymakers have reason to smile, as the economy has rebounded in 2017. A stronger global economy has boosted exports and revived the manufacturing sector. Consumers and businesses are spending more, and GDP expanded at an annualized rate of 1.0% in the first quarter. The fly in the ointment? Inflation is stuck below 1 percent, well below the BoJ's target of 2 percent. Tokyo Core CPI, the primary gauge of consumer inflation, edged down to 0.0%, below the estimate of 0.2%. The BOJ has implemented a radical accommodative monetary policy, but inflation levels remain well below the BOJ's target of 2.0%. After a fruitless battle to raise inflation, the BoJ appears ready to raise a white flag (of sorts) and lower its inflation target when policymakers gather for a rate meeting on July 20. It remains to be seen to what extent the bank lowers the bar, but traders should be prepared for some volatility from the yen if the BoJ does adjust its inflation target.

Federal Reserve policymakers have consistently projected one final rate hike in 2017, but the markets remain skeptical. The odds of a December rate hike are pegged at only 50%, while the likelihood of an increase in September is just 18%. The US economy slowed down in the first quarter, and there are signs that Q2 will also be soft. Consumer spending, which comprises two-thirds of US economic growth, remains soft. Another sore point in the economy is inflation, which remains below the Fed's target of 2%. In June, Fed Chair Janet Yellen shrugged off inflation worries, saying that she expected inflation to remain soft due to temporary factors. The dollar was broadly higher after the June rate statement, as Fed policymakers were surprisingly upbeat about the economy and dismissed concerns about low inflation levels. Traders should keep a close eye on the minutes, which could be a market-mover. Will the Fed minutes present a positive view of the US economy? If yes, the dollar could respond with gains.

USD/CHF - 0.9654

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9663

Kijun-Sen level                    : 0.9661

Ichimoku cloud top                 : 0.9640

Ichimoku cloud bottom              : 0.9611

Original strategy :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 0.9600, Target: 0.9700, Stop: 0.9565

Position : -

Target :  -

Stop : -

As the greenback surged again earlier today after staging a strong rebound from 0.9552 (last week’s low), retaining our view that a temporary low has been formed there and consolidation with mild upside bias is seen for this move to bring retracement of recent decline, hence gain to 0.9690-00 is likely, however, reckon upside would be limited and price should falter below resistance area at 0.9738-43, bring retreat later.

In view of this, would not chase this rise here and we are looking to buy dollar on pullback as 0.9600 should limit downside and bring another rise later. Below 0.9565-70 would abort and signal intra-day top is formed, risk retest of 0.9552 first.

GBP/USD - 1.2912

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2911

Kijun-Sen level                    : 1.2921

Ichimoku cloud top              : 1.2972

Ichimoku cloud bottom        : 1.2942

Original strategy :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : - 

Target :  -

Stop : -

New strategy  :

Buy at 1.2865, Target: 1.3000, Stop: 1.2830

Position : -

Target :  -

Stop : -

Although the British pound has remained under near term downward pressure and initial downside risk remains for the corrective fall from 1.3030 (last week’s high) to bring retracement of recent upmove to 1.2880-85 (38.2% Fibonacci retracement of 1.2640-1.3030), reckon downside would be limited to 1.2865-70 and bring another upmove later, above 1.2960 would signal low is formed, bring rebound to 1.3000 but break of said resistance at 1.3030 is needed to signal recent upmove has resumed and extend further gain towards recent high 1.3048. 

In view of this, we are looking to buy cable again on further corrective fall as previous resistance at 1.2861 should turn into support and contain downside, bring another rise. Below 1.2830-35 (50% Fibonacci retracement of 1.2640-1.3030) would abort and signal top is formed, bring further fall towards support at 1.2794.