– Fade the FOMC minutes (over)reaction
The USD has emerged a clear winner overnight – the DXY index closed above its 200-day MA resistance . Dollar strength was initially driven by the sell-off in commodities and subsequently by market reaction to the FOMC minutes. The reaction to the January minutes was very similar to those from December as markets focused on the hawkish-leaning segments, notably that several on the FOMC said that the Fed should be prepared to vary the pace of asset purchases, due to economic or policy risk considerations. The broader reading is arguably much more balanced as other members warned against ending QE too early. Our economists also note that several members suggested an option of holding assets on the balance sheet for a longer period, which would effectively amount to an easing tool. What is also noteworthy is that the reaction in FX has been much more pronounced than in the Treasury markets where the 10y yield is little changed relative to prior to the minutes. As we argued after a similar market reaction to the December minutes, we do not believe this amounts to a ‘game changer’ for QE3. The Fed will remain focused on data rather than arbitrary dates and overnight’s softer housing starts highlight the risk to the US economy, especially as the impact of the fiscal tightening (fiscal-cliff tax hikes and the spending sequestration) continues to bite into growth over the coming months.In this context, our bias remains to sell into USD rallies.
Click here to read the full report: Europe
BNP Paribas