Dollar Sold Off After Fed's Confusing Messages

Dollar dropped sharply overnight as markets were rocked by Fed's mixed messages. The FOMC minutes for the June meeting sent a mixed message to the public regarding Fed's tapering of QE. At the minutes, it was unveiled that many of the policymakers did not believe that it would be appropriate to taper asset purchases at the moment. Yet, at the addendum, it was indicated that almost half of the participants would like to pare the purchases later this year. Participants in the latter included non-voting members. Financial markets were lifted by the comments as it signaled the Fed might not begin tapering as soon as previously anticipated.

These 2 conflicting messages have made the outlook of the Fed policy stance more confusing. Yet, participants in the economic projections included non-voting members. This suggested that non-voting members are having a more hawkish outlook than the voting ones. At the press conference, Fed Chairman Bernanke affirmed that the Fed's monetary stance would remain dependent on the economic data.

Meanwhile, Bernanke said in a speech that the "highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy," He said Fed is trying to communicate two different policy tools. And, Fed is "trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability." He noted that there will be "sometime after we hit 6.5 percent before rates reach any significant level." He emphasized that "there is some prospective, gradual and possible change in the mix of instruments, but that shouldn't be confused with the overall thrust of policy which is highly accommodative."

Financial markets responded rather differently. 30 year yield surged to a new high of 3.792% before closing at 3.688%, still another higher close. But 10 year yield, while also rose, was limited below recent high and closed at 2.68%. Stocks had little reaction and closed slightly lower by -8.68 pt at 15291. Dollar index dropped sharply and is trading at 82.7 at the time of writing, comparing to the 2013 high of 84.75 made earlier this week. We're not anticipating deeper selloff the the dollar index, but rather, it should enter into a phase of sideway trading below 84.75 in near term. EUR/USD and GBP/USD should have bottomed in short term and we'd expect more consolidation. But we're not seeing any confirmation of trend reversal.

In Japan, BoJ hold policy unchanged as widely expected. The target to expand the monetary base by JPY 60 to 70 T per year was maintained. Rate was kept near to zero. The vote was unanimous. BoJ noted in the statement that economy is "starting to recover moderately", an upgrade from prior outlook of "picking up". Kiuchi proposed to make the 2% inflation target a medium- to long-term goal, rather than 2 years, but was voted down 8-1. Inflation forecast was kept unchanged as it expected inflation to reach 1.9% in the fiscal year starting April 2015. Though, inflation projection in nearer term was revised down to 0.6% in current fiscal year and 1.3% in next.

On the data front, New Zealand business NZ manufacturing index dropped to 54.7 in June. Japan machine orders rose 10.5% mom in May. Australia employment unexpectedly rose 10.3k in June, but unemployment rate rose more than expected to 5.7%. Canada new housing price index, US import price index and jobless claims will be featured later today.