Dollar Recovered, Yield Jumped After FOMC Minutes

The dollar recovered overnight after the minutes for the October FOMC meeting suggested that Fed would start tapering the USD 85b per month asset purchase program "in coming months". The minutes noted that officials generally expected labor market outlook to improve which warrant the tapering. Meanwhile, the minutes also noted that "it might well be appropriate to offset the effects of reduced purchases by undertaking alternative actions to provide accommodation at the same time." Some officials expressed that it's "premature" prefer further improvements in the job markets first as "more time was needed to assess the outlook for the labor market and inflation."

Nonetheless, it should be reminded that recent comments from key Fed officials remained rather dovish. Fed chairman nominee Yellen said last week in the confirmation hearing that "it's important not to remove support, especially when the recovery is fragile". Fed chairman Bernanke said earlier this week that Fed would "maintaining highly accommodative policies for as long as they are needed" and rates could remain low "perhaps well after" unemployment rate drops below the 6.5% threshold. Chicago Fed Evans said that he's "not in a hurry" to scale back the USD 85b per month bond purchase and Fed is likely going longer at that pace. Evans predicted Fed bond purchase could top USD 1.5T level.

US equities responded negatively to the news with DOW ending down -66.21 pts to close at 15900.82. That compared to the intraday historical high made at 16030.3 earlier this week. S&P 500 also dropped -6.5 pts to close at 1781.37. Treasury yield jumped sharply with 30 year yield closing at 3.905%, up from prior close of 3.804%. 10 year yield also rose sharply to close at 2.792%, comparing to prior close of 2.712%. The break of last week's high suggests that recent rebound in yield is resuming and would provide some additional support to dollar, in particular in the USD/JPY.

Meanwhile, The euro was knocked down by reports that ECB council members have discussed lowering deposit rate to -0.1%. The move would be aimed at obliging banks to pay to hold a liquidity cushion and prompt them to lend cash to businesses. ECB president Draghi has already made it clear that the central bank is technically ready for negative deposit rates in prior policy meeting. Though, it's also reported that there is consensus among policy members yet. ECB declined to comment on the report.

IMF said Australia dollar is 10% overvalued but the cash rate remains appropriate. IMF noted in a statement that "with growth currently on the soft side, the real exchange rate still overvalued and weighing on the non-mining sector, and inflation within the target range, monetary policy should remain accommodative."

In China, PBoC deputy governor Yi Gang said that "it's no longer in China's favor to accumulate foreign exchange reserves" as "the marginal cost of accumulating foreign-exchange reserves has exceeded the marginal gains." Earlier this week, PBoC governor Zhou Xiaochuan also said that the central bank would basically end the regular FX market intervention, paving the way for de-pegging RMB from the USD. Overall, the analysts took the message that China is going to scale back intervention in the currency markets.