So far it has been a very quiet week in terms of U.S. data, which is a problem for currency traders because the lack of fresh U.S. economic reports makes it difficult to put a finger on the odds of QE3 in the third quarter. Last week's non-farm payrolls report divided the market, with some economists arguing that job growth wasn't weak enough for the Fed to pull the trigger on another round of stimulus. Others believed three months of payrolls below 100,000 keeps QE3 on the table. This lack of agreement means that every piece of incoming economic data will be assessed for on its impact on Fed policy.
This morning's secondary small business and economic optimism reports rarely garner attention from the Fed. According to the National Federation of Independent Businesses, small business confidence fell to its lowest levels in two years. Although consumer confidence ticked up slightly in the month of July, according to Investor's Business Daily, Americans grew less optimistic about the economic outlook and their personal finances. The only reason the index increased was due to expectations for support from federal policies.
With this in mind, tomorrow's FOMC minutes could help shape the market's expectations for QE3. When the Federal Reserve last met, they extended Operation Twist and downgraded their GDP and inflation forecasts. Instead of downplaying the weak non-farm payrolls report like in April, Bernanke admitted this time around that the Fed was too optimistic. He made it clear that they still have ammunition and would consider further asset purchases if necessary.
This means there is a good chance that tomorrow's FOMC minutes will show a great deal of pessimism within the central bank, which would build the case for QE3 and be negative for the dollar. The only problem is that concern about the outlook for the U.S. economy and a general sense of dovishness is what the market currently expects from the Fed.
Therefore, if the central bank sounds even the slight bit wishy-washy about QE3, the dollar could rise against the Japanese yen. Yet don't expect the rally to last for long because at the end of the day, the simultaneous weakness of the U.S., Eurozone and Chinese economies will eventually force the Fed to spring into action.
In other words, we don't believe the FOMC minutes will provide much support for the greenback. Aside from the FOMC minutes, the U.S. trade balance data is also scheduled for release. Despite a sharp deterioration in manufacturing activity, a small improvement is expected.