Dollar - One Key Takeaway from the FOMC Minutes

  • Dollar - One Key Takeaway from the FOMC Minutes
  • Is EUR Poised for a Move to 1.30?
  • AUD: Breaks 1.05, Further Gains Hinge on Employment
  • NZD: Climbs to Fresh 1 year Highs
  • CAD: Gold Down 1.5%, Oil Up Slightly
  • USD/JPY - Inching Towards 100
  • GBP - Held Back by Dovish Comments from Miles 


Dollar - One Key Takeaway from the FOMC Minutes


The performance of the U.S. dollar today was mixed with the greenback appreciating against the euro, Japanese Yen and Swiss Franc but weakening against the commodity currencies.  The only excitement was the early release of the FOMC minutes.  The report was originally due out at 2pm ET but was "accidently" released early around 9am ET (wondering if this person will join the unemployment rolls next month).  As we anticipated, the notion of tapering asset purchases this year received more support in March and that sentiment triggered a knee rally in USD/JPY.  According to the Fed minutes, all but a few members of the FOMC felt that it was appropriate to continue asset purchases at its current pace until the middle of this year but several see the purchases slowing later in the year and completely stopping by year end. One member even felt that asset purchases should be slowed immediately. 


This optimism and less dovish stance from the Fed is no surprise considering that the March 19/20 FOMC meeting came on the heels of a huge jump in non-farm payrolls and large rise in retail sales.  We continue to believe that FX traders should discount the minutes because since the last meeting, we have seen a huge pullback in job growth, decline in consumer confidence, slower manufacturing and service sector activity.  The only unambiguously positive development has been the persistent rise in U.S. stocks.  Yet there is one important takeaway from today's release, which is that the Fed is getting very close to paring back stimulus.  If the March payrolls report was good, they would have probably announced plans to vary asset purchases as early as June or 2 FOMC meetings from now when Bernanke delivers his next press conference.  There is likely to be more cautiousness at the April 30 / May 1st monetary policy meeting but if payrolls are revised higher and there is a significant recovery in the next release, the Fed could slow asset purchases in September.  In other words, as soon as we get some consistently good reports, the central bank will be ready to taper their purchases, which could kickstart a new uptrend in the U.S. dollar.


In the meantime, incoming economic data will be important in shaping the central bank and the market's expectations for changes in Fed policy.  Jobless claims are scheduled for release tomorrow and after the strong rise in claims the previous week, we really need to see a sizeable decline for the USD/JPY rally to continue.


Is EUR Poised for a Move to 1.30?


The euro was under pressure against the U.S. dollar for most of the North American trading session.  There were no major Eurozone economic reports released outside of French industrial production, which increased 0.7% in the month of February.  The Federal Reserve's talk of tapering asset purchases supported the dollar but not before the currency pair failed right at the 50-day SMA at 1.3210.  Early gains in the European trading session failed to last. The European Central Bank is publishing its monthly report tomorrow and given Mario Draghi's concerns about downside risks, we expect the more caution from the central bank.  Final German consumer prices are also scheduled for release and no major changes are expected.  Judging from the daily chart of the EUR/USD, the fact that the currency pair ended the day near its lows suggests that we could see a deeper correction to 1.30.  If the ECB monthly report is as pessimistic as we expect and U.S. jobless claims rebound, these fundamental forces could drive the EUR/USD to this level. 


AUD: Breaks 1.05, Further Gains Hinge on Employment


The best performing currency pairs today were the Australian and New Zealand dollars.  The AUD/USD is now trading well above 1.05 while the NZD/USD climbed to fresh 1 year highs with more gains likely.  Last night, China reported its first trade deficit in more than a year with export growth slowing materially but AUD and NZD soared because imports rose a whopping 14.1% yoy, a sign of strong consumption that is nothing but good news for countries that rely on Chinese demand like Australia and New Zealand.    Japanese demand for higher yielding investments is also contributing to the persistent rallies in the AUD and NZD but the sustainability of these gains will hinge in part on tonight's Australian employment numbers.  After a surge in job growth in February, job losses are expected for March.  If you recall, last month, Australia reported its largest gain in employment in 13 years.  Even though nearly all of the increase was in part time work, it was still good news for consumption and the economy as a whole.  No one expects the blockbuster jobs number in February to be repeated in March but if employment change remains positive and full time jobs increase, it may be enough for the AUD to extend its gains.  The NZD/USD completely ignored the decline in credit card spending but tonight's Business PMI report could affect NZD.  Canada had no economic data on the calendar but its new housing price index will be released tomorrow.


USD/JPY - Inching Towards 100


While Japanese Yen crosses climbed to fresh highs after the early release of the Fed minutes, USD/JPY has yet to hit 100. The currency pair is slowly grinding higher and its sluggish movement suggests that the first real test of 100 may not be the one that breaks.  No major Japanese economic reports were released overnight and Bank of Japan Governor Kuroda's comments did not hurt or help the Yen.  According to Kuroda, the BoJ's has done what is necessary and possible for now and while they will check on policy needs every month, they don't see a need to adjust policy that often.  This suggests that they may not announce additional measures at the end of month.  Given the significant weakness in the Yen, both BoJ Kuroda and Prime Minister Abe felt the need to say that their policies are not aimed at intentionally weakening the Yen but strong easing can cause stocks to rise and the Yen to weaken.  Tonight's Machine orders and Domestic CGPI reports are not expected to have much impact on the Yen.  We believe that 100 will be tested very soon.  


GBP - Held Back by Dovish Comments from Miles  


The British pound traded slightly higher against the euro today but ended the day unchanged against the U.S. dollar.  With no U.K. data on the calendar, sterling was hit by comments from policymakers.  This morning David Miles, who is one of the most dovish members of the Bank of England said the U.K. needs "very expansionary monetary policy" as "growth is likely to remain very weak."  He felt the country was in an incredibly difficult situation with growth lacking and inflation uncomfortably above their target.  At the last monetary policy meeting he was one of the minority voting in favor of more Quantitative Easing and this morning, he reiterated that more stimulus is the right policy. Unfortunately other members of the central bank including Fisher who is also one of the more dovish members felt that there are limits to what monetary policy can do. While there's a general feeling that the hands of central bank are tied, we continue to believe that sterling is poised for further losses.  Unfortunately that may not happen until next week as there are no major U.K. economic reports on the calendar for the rest of the week.

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