Currency Briefing: July minutes show officials divided

on Aug 21, 2013
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Minutes from the FOMC`s July policy meeting delivered no clear indication on when the central bank will start curbing back its $85 billion bond-buying program.

The minutes from the July 30-31 meeting confirmed officials divided about the best timing of the first reduction in bond purchases, with “a few” officials with votes on policy looking to move soon and “a few” urging more caution.
Over all, the minute gave the impression of a committee hesitant about drawing conclusions from the incoming economic data with persisting doubts about the economy`s underlying strength. Despite continuing strength in housing market with normalization making progress, a number of members indicated that they “were somewhat less confident about a near-term pick-up in economic growth than they had been in June.” According to Dean Maki, chief U.S. economist at Barclays, with reference to the Fed`s annual forecast of growth for 2013, the economy would have to expand at 3.25 to 3.5 per cent in the second half of 2013. Few observers expect that to happen, although the growth is expected to be better than the 1.4 per cent rate of the first half of 2013.

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Since Fed Chairman first indicated that stimulus efforts might ease, trading in fixed income, stocks and currencies has been volatile over the globe. The asset purchases and ultralow rates made it cheap to borrow in many countries, while also bolstering stock markets around the world. While this era is ending, the minutes revealed that members were concerned about how to accurately to communicate the pace to investors.

Bond yields turned sharply higher in May and June on worries about when the Fed would begin to curtail its bond-buying program. Yields settled for much of July and August, but resumed their ascent last week as thin markets and a lack of clear data ignited further volatility. The German 10-year benchmark rose by 3 basis points to 1.872 per cent, whereas the UK`s 10-year guilt yield rose by an additional 3 basis points to 2.705 per cent.

Another focus on the minutes was how the economy and the housing sector, in particular, would deal with rising interest rates, which moved up sharply in the wake of Mr. Bernanke`s comments after the Jun 19 meeting. According to the FOMC`s minutes, “several participants expressed confidence that the housing market would be resilient in the face of the higher rates” relying on factors, such as healthy consumer confidence, banks` increased willingness to make mortgage loans as well as the fact that rates remained low by historical standards.

To conclude, Fed policy makers were “broadly comfortable” with Chairman Ben Bernanke`s plan to start reducing bond buying by the end of the year if the economy improves as expected.
Following the minutes, the euro jittered to 1.3336 from Wednesday`s morning 1.3412 high. A rise above this week`s high of 1.3453 would suggest ongoing strength to 1.3500/20, the minor psychological level and the Feb 13 high where the euro is expected to pause.
A plethora of economic indicators from both sides of the Atlantic today, with markets expected to digest the FOMC readiness to pull the trigger by the end of the year, with the Jackson Hole symposium, Eurozone Market Manufacturing PMI, U.S. Initial Jobless claims, U.S. Manufacturing PMI, U.S. Housing Price index and Kansas Fed Manufacturing activity being the most meaningful.

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