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The minutes from the last Federal Reserve meeting seem to suggest that members are starting to coalesce around Janet Yellen's analysis that monetary policy should be more accommodative (see "Yellen's Case for More Easing Primes Fed to Act Sooner Than Later"). While I have been expecting such a thing, I was completely surprised that minutes from the meeting could spark as big a response as it did in financial markets. I am assuming that the following sentence packed the most powerful punch:

"Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

While we never know how many is "many," this statement is a much more aggressive tone than the standard policy reminders that the Fed remains ready to act if economic conditions worsen. This statement portrays a Fed with its finger hovering over the big fat "ease button." In other words, these "many" are likely getting increasingly impatient with a stagnant recovery and do not want to wait for worsening conditions before acting (again, this attitude would be consistent with Yellen's analysis).

The impact of the minutes was clear in driving gold and silver prices upward and the U.S. dollar downward. Perhaps the most significant impact is the fresh disturbance caused in foreign exchange. If market participants are increasing the odds of a weaker U.S. dollar, then anyone seeking safety will have to look elsewhere. That elsewhere is likely the Japanese yen. Indeed, the yen surged against most major currencies in the wake of the minutes release.

Up until last Friday, the Japanese yen (NYSEARCA:FXY) had been steadily weakening, especially against the U.S. dollar. I was starting to think that the USD/JPY currency pair in particular would repeat the sharp run-up from these levels in February. Instead, USD/JPY hit a wall against its 200-day moving average (DMA) and crept lower. The yen's surge after the release of the minutes confirmed the end of the now brief relief rally. The following charts show how the yen has fared against various currencies. I include some commentary below each graph. Note in particular how resilient the euro has been and how the Australian dollar has already lost its bullish position from the previous breakout (see "Another Important Breakout for the Australian Dollar").

(click to enlarge)

The USD/JPY steady rally off recent lows comes to a swift end this week thanks to the Federal Reserve minutes.

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The Australian dollar looks like it is now breaking down against the yen.

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Like the USD, the British pound is struggling at the 200DMA against the yen, but it remains well above recent lows.

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The euro has already recovered its losses against the yen and its current relief rally looks ready to resume.

Source: FreeStockCharts.com

The recent weakness in the yen seemed to be in anticipation of a poor economic report on Japanese exports. On August 21st, the Japanese Finance Ministry released numbers demonstrating steep declines in exports (see for example "Japan Swings to Trade Deficit as Exports Sink on Europe: Economy"). In particular:

"Exports fell 8.1 percent from a year earlier, compared with an estimated 2.9 percent drop…Shipments to the European Union fell 25 percent in July from a year earlier, the biggest decline since October 2009, while those to China slipped 12 percent, the {Finance Ministry] said. The trade deficit was the biggest for any July in data going back to 1979, it said."

Of course, commentators assigned at least partial blame for these poor results on the strong yen. If the Federal Reserve succeeds in weakening the dollar at the expense of a strengthening yen, the Finance Ministry and Bank of Japan will face ever more intense pressures to act against the strengthening currency. Finance Minister Jun Azumi has so far attempted a lot of jawboning, but the effectiveness of such action has waned considerably.

I am watching the 78 level on USD/JPY closely. If the yen's strength accelerates through that floor, I think the odds increase accordingly that the Japanese will move to intervene. For now, I suspect Azumi is desperately eager to wait out any moves by the Fed. While the Japanese have been quite unsuccessful in weakening their currency with monetary policies, the Fed has found plenty of success. Anything Azumi does right now will surely get completely nullified by the Federal Reserve later. The currency wars continue.

Source: Federal Reserve Minutes Renew Pressure On Japanese Yen

Additional disclosure: In forex, I am short EUR/AUD