Forex: Dollar Climbs after FOMC Minutes Confirm September Taper

Though some may lament the level of volatility and trend development that followed this past session’s top fundamental release – the FOMC minutes – the event nevertheless proved bullish for the dollar and bearish for US equities. That is the kind of outcome that promotes the return of the market’s most prolific fundamental theme: risk-defined positioning. We have seen a positive correlation persist between the FX market’s favored reserve currency and the benchmark risk asset (US equities) throughout 2013. This presents a backdrop where the naturally-derived balance between fear and greed has softened while the distortion caused by the central bank’s stimulus program leverages its influence on capital allocation. Yet, as the Taper nears, we not only return to elemental sentiment; the market recognizes its risk exposure.

From the Fed’s record of discussion points from the July 31 policy meeting, we were given further evidence that the central bank will move to reduce its monthly stimulus purchases at the September gathering. This is not a revelation, rather it slowly increases the probability that the first step in a full-scale stimulus withdrawal will begin next month. And, the more likely the event, the heavier the positioning becomes to precede its outcome. The revelations from these minutes were that “almost all participants” confirmed they supported the Taper timeline that Chairman Bernanke laid out after the June rate decision. Elsewhere, the transcript showed “a few” were calling for patience before changing the pace of stimulus while “a few” suggested the need to move was close at hand. Before we consumed this report, we had already seen 65 percent of economists call a Taper in September while sharp moves from the likes of Treasury yields have indicated market complicity for weeks. The next phase of Taper speculation is for full scale risk aversion in delivering to strike. But it is unclear what escalates this fear.