FOMC Minutes - Expectations And USD Implications

Via Steven Englander of Citi,

So we get FOMC Minutes at 2PM and I find that investors are not paying much attention. Recall, however, that asset markets rallied when the FOMC released the Statement and then sold off on fears that the FOMC was hinting at a quicker than expected pullback of Fed stimulus. The pullback logic was based on how rapidly the US economy is approaching 6.5%  or a read of the Statement/Press Conference comments that suggested that we might see some pullback from QE in 2013.

The question is whether the Fed really meant to convey that type of hard conditionality or incipient stimulus withdrawal. That wasn’t the read of Citi’s economists in the aftermath of the FOMC, and the more involved discussion that the Minutes describe could convey that the FOMC’s unambiguous intention was to sent a stimulative message.

If so, we could get another leg up on the risk rally and leg down on the USD. While an S&P rally on the surface looks USD positive, the fiscal/monetary/political mix is likely to generate USD weakness rather than strengths. The problem with USD is not the growth prospects as compared to other major countries, which will be respectable.

The USD’s problem is the amount of monetary stimulus it takes to get that outperformance, which means that US liquidity is in chronic excess supply, leaving investors looking for assets both inside and outside the US that can provide an adequate return. On top of that now is the fiscal uncertainty that comes from deficits that are unlikely to be reined in any time soon and a political process that depends increasingly on brinksmanship. Put together with Asian markets rebounding, it suggests that global investors will want a discount via the currency in order to hold dollar assets.