The FOMC minutes have been released and there was some confusion on the release as to whether they were dovish or hawkish. The reason for the confusion was due to traders trying to interpret the minutes in light of the weaker economic data that we have seen recently. So, think of the CPI miss and the weak University of Michigan sentiment from last Friday. This resulted in some pretty choppy action with the USDJPY moving lower and then higher over the next 12 hours after the release. So, at times like these what can we learn? Let’s break it down to get some clarity.

  • ‘Substantial further progress has not yet been met’ regarding the labour market conditions according to most participants. But the last jobs report came after the meeting, so that would have ticked all the right boxes. This means that another good jobs report in September will almost certainly result in a Q4 tapering.
  • However, most folks judge tapering could be appropriate this year as they saw the Fed close to the goal of ‘substantial further progress’.
  • The committee wants to stop the market thinking that a move towards tapering has a mechanical link towards rising interest rates. Ok, that’s dovish, but hard to see how the market will not see tapering as a broadly bullish sign and that rate rises are the next obvious step. The FOMC minutes just want traders to not think the link is automatic.

The bottom line

Tapering is coming and likely to be in Q4 as long as the US economy keeps moving in the right direction. There is no obvious trade to take from this except to say that a USDJPY buy from major support levels makes sense as long as the Fed are moving towards tapering. Also, if we get another strong-jobs-report in September, that will mean taper expectations should strengthen the USD and weaken gold. A medium-term buy bias for USDJPY still makes sense as long as tapering expectations by the Fed are there.