FOMC Minutes and FX

As hinted by the FOMC statement last month, the minutes showed the Fed is a bit more optimistic about growth this year--forecasting 3.4%-3.9% growth vs 3.0%-3.6% previously. The inflation forecasts look essentially unchanged at 1.3%-1.7%. That said, the risks of deflation have diminished. The minutes also confirm that the a minority at the Fed are not convinced that the bond purchases are helping the economy much and want to reconsider the purchases if the data continues to point strong growth. The minutes are clear, however, that the economic outlook is unlikely to change by such a magnitude before the $600 bln of Treasuries are purchased. Worries include muni bond market, housing market and Europe.

It has been an unusually choppy session and given the news about Iranian ships and the counter-intuitive price action, it is hard to separate the noise from the signal. One signal that we have found fairly reliable are interest rate spreads and they are moving in the US direction, continuing the recent trend. We expect the dollar to find better traction against the euro. The dollar is bumping against resistance against the yen in the JPY84 area. Sterling found a good bid on the dip below $1.60 as the market has trimmed, but not negated expectations of a UK hike in Q2.