THE TAKEAWAY:USD Fed’s June 18 to 19 FOMC Meeting Minutes > Majority of Fed see reasons to taper sooner than later > However, significant progress needs to be made in the labor market > USDOLLAR BEARISH
The Federal Reserve’s June 18 to 19 FOMC meeting Minutes proved to be a bit more dovish than US Dollar bulls were hoping for, as there lingered measurable hesitation among FOMC members to taper QE3 from its current $85B/month pace. On balance, the Minutes were less hawkish than Fed Chairman Bernanke’s post-meeting press conference would imply; but the Minutes still maintain an optimistic undertone regarding the US economy nevertheless.
USDJPY 1-minute Chart: July 10, 2013
Charts Created using Marketscope – prepared by Christopher Vecchio
Following the announcement, the USDJPY initially rallied from ¥100.33 to as high as 100.63, before immediately reversing and setting new weekly lows within 15-minutes of the release. At the time this report was written, the USDJPY had rebounded to 100.17. Price action was similar across the other components of the USDOLLAR, with the AUDUSD, the EURUSD, and the GBPUSD all falling briefly, rallying sharply then finally fading gains towards the bottom of the hour.
Accordingly, as the US Dollar surged after the June 18 to 19 policy meeting and ensuing press conference, the tires have come off the world’s reserve currency a bit in the aftermath. (However, a weaker US Dollar post-FOMC was discussed earlier today.) Here are the key points that are driving price action:
On non-standard policy measures:
- The Committee again discussed its strategy for the eventual normalization of the stance of monetary policy and the size and composition of the Federal Reserve's balance sheet
- Participants continued to think that the Federal Reserve should, in the long run, hold predominantly Treasury securities. Most, however, now anticipated that the Committee would not sell agency mortgage-backed securities (MBS) as part of the normalization process,
- Some indicated that limited sales might be warranted in the longer-run to reduce or eliminate residual holdings.
On the US economy:
- Economic activity continued to increase at a moderate rate in the second quarter.
- Measures of longer-run inflation expectations remained stable.
- Total government employment continued to decline somewhat.
- The rate of long-duration unemployment declined slightly, while the share of workers employed part time for economic reasons was little changed; both of these measures remained well above their pre-recession levels.
- Households' net worth likely increased in recent months, as equity values and home prices rose further.
On policy communication and the recent rise in US Treasury yields:
- Federal Reserve communications over the period reportedly were interpreted by market participants as pointing to a less accommodative stance of future monetary policy than they previously had expected.
- The rise in longer-term Treasury yields appeared to reflect both an increase in term premiums and a rise in expected future short-term rates. The rise in term premiums, in turn, likely reflected in part a reassessment of the pace and ultimate size of the Federal Reserve's asset purchase program, as well as increased uncertainty about the future path of monetary policy.
--- Written by Christopher Vecchio, Currency Analyst
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