US Dollar, Yen Rally as Beige Book Affirms Recent Shift in Fed Policy
The economic docket out of the United States was thin on Wednesday, but the Federal Reserve’s Beige Book provided enough information to prompt a pullback by equity markets and the USDJPY to depreciate. According to the Fed’s recent edition, economic activity from mid-February to late-March expanded at a “modest to moderate pace.” It is worth noting that in the first two editions of the report released earlier this year, the report characterized growth using the same language.
The Beige Book report can be pivotal in policy set forth by the Federal Open Market Committee; the report, usually released two weeks before a rate decision, is often the center piece of discussion when the committee meets to determine the Fed’s monetary policy going forward. Overall, the Fed’s twelve regional banks reported that manufacturing activity continued to expand, although rising energy prices prompted a “concerned” outlook among manufacturers.
In terms of consumers and the housing market, the report noted that “residential real estate showed some improvement,” while several districts reported “increased credit quality.” Labor market growth was reported as “steady to modest,” largely reflecting the labor conditions presented in this month’s disappointing nonfarm payrolls report.
Overall, with the report reflecting the steady improvement by the US economy, upward trends in household credit, household spending, manufacturing activity, and modest growth in the labor market, by no means are the Fed’s twelve districts reporting conditions that would necessitate another round of stimulus. In other words, today’s Beige Book further underscored the sentiment outlined at the March 13 meeting (and subsequent minutes) that further quantitative easing, at present time, is unnecessary.
USDJPY 1-min Chart: April 11, 2012
Charts Created using Marketscope – Prepared by Christopher Vecchio
Following the release, markets steadily pared back their gains as the Dow Jones Industrial Average dropped approximately 30 points. The most notable price action came in the USDJPY as the pair halted its intraday rally to fall back below the 81.000 level. More importantly, the USDJPY move reflects the shift in yields that occurred post-release; Treasury yields pulled back reflecting a desire for safety among market participants.
While lower yields are generally bearish for the US Dollar, it is clear that the move after the release reflects another shift away from easing expectations by market participants and in turn a flight to safer assets: the USDJPY fell (shift in yields) and the AUDUSD and EURUSD fell too (risk-aversion). If economic data out of the United States in the coming weeks continues to suggest a mild recovery is underway, then it is unlikely that the Fed eases further, thereby improving the US Dollar’s prospects for the remainder of the first half of the year.
--- Written by Christopher Vecchio, Currency Analyst
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