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FOMC Minutes out Early; Policymakers Signal QE3 to Taper in 2013

Christopher Vecchio

THE TAKEAWAY: USD FOMC releases March 19 to 20 meeting Minutes > Growing opinion among policymakers that QE3 should be reduced later in 2013 > USDOLLAR BULLISH

Note: An administrative error at the Federal Reserve forced the world’s most important central bank to make an uncommon decision: release the prior month’s meeting Minutes at 09:00 EST/13:00 GMT as opposed to the typical release time of 14:00 EST/18:00 GMT. With the March Minutes being released on Tuesday at 14:00 EST/18:00 GMT to several dozen Congressional leaders and trade groups, it was necessary for the Fed to release the Minutes early today to limit potential trading on material nonpublic information.

The Fed’s March Minutes continued the trend of improving sentiment among policymakers, albeit at a very slow pace. Noting that “economic activity was expanding at a moderate rate in the first quarter of this year after the slowdown late last year,” Fed policymakers put forth a consensus view that QE3 asset purchases would be tempered at some point in 2013. The key section from the Minutes stated:

In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year.

Accordingly, it is looking increasingly likely that QE3 could be wound down beginning in the late-3Q’13 or 4Q’13, although the long-term structure of the labor market is likely to prevent the Fed’s main interest rate from rising from its current level of 0.00% to 0.25%. (The Minutes stated: “The rate of long-duration unemployment and the share of workers employed part time for economic reasons were little changed, on net, and both measures remained high.”) Overall, this slice of commentary is being view as cautiously optimistic on the US economy, and therefore supportive of the US Dollar.

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Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) 1-minute Chart: April 10, 2013

FOMC_Minutes_out_Early_Policymakers_Signal_QE3_to_Taper_in_2013_body_Picture_1.png, FOMC Minutes out Early; Policymakers Signal QE3 to Taper in 2013

Charts Created using Marketscope – Prepared by Christopher Vecchio

Typically, reactions in the EURUSD and the USDJPY (among the other USD-based majors) tend to be quite volatile following the release of the Fed’s Minutes, but with their leak earlier yesterday, the direct impact on trading at 09:00 EST/13:00 GMT is less clear and accordingly, a degree immeasurable. Those market participants got off guard by the early release, however, viewed the Minutes as constructive for the US Dollar, bidding the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) up from 10486 to as high as 10495, the session high. At the time this report was written, however, prices began to pullback and move towards the release reaction low of 10478.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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