April 2015 FOMC Minutes Set Bearish Tone For USD

by: FX Analyst


April 2015 FOMC minutes are surprisingly bearish as they clearly acknowledged the numerous weaknesses in the US economy.

This is dampened by the FOMC's view that this is due to transitory factors related to winter, energy prices, and import prices.

USD had a bearish breakout, and unless there are strong economic reports, this bearish momentum would hold until June FOMC minutes.

In my previous article, USD Waits For Pivotal Economic Data In May 2015, I assumed that the USD would sit tight in a range as it looks forward to the May data. This would confirm if the first-quarter weakness is temporarily due to harsh winter or start of a new trend of economic weakness. I had predicted that the PowerShares DB USD Bull ETF (NYSEARCA:UUP) would stay in the range of $25.25 to $26.50. I was wrong.

My mistake came from my assumption that the April FOMC meeting would be a non-event, as the Fed has already ruled out any rates liftoff. It turns out that the FOMC had a surprisingly bearish tone as it acknowledged the weaknesses since March with alarming clarity. It was this meeting on 29 April 2015 that broke the UUP below the $25.25 level.

Transitory Elements of Winter, Energy Price & Imports

This FOMC clearly noted the economic disappointments in the form of slowing jobs growth, weaker household spending, softer fixed business spending, slow recovery in housing, and declining exports. It is the first time in recent years that the Fed had listed that many weaknesses in the economy.

However, the FOMC sees these weaknesses as transitory due to a harsh winter as was alluded in the speech of New York Fed President William Dudley earlier in the month. Economic activities are expected to pick up when spring came this month. Furthermore, 2 other factors were listed as transitory, namely the low energy price, and for the first time, decreasing prices of non-energy imports.

Recent price movement of the Brent crude oil has shown that the FOMC assumption that it is transitory has played out well. Brent crude oil has bottomed out at $45 in mid-January 2015 and has now gone up above $65.

The pace of recovery is slow, but steady. The other transitory influence is the decreasing prices of imports, and this can be attributed to the USD strength in its 17% run-up since June 2014 to April 2015. If we were to refer to Dudley's speech, we would know that he attributed this to the soaring USD strength due to monetary and economic divergence between the US and other major economies. The US dollar follows the performance of the USD against a basket of the most liquid currencies in the world such as EUR/USD, GBP/USD, USD/JPY and AUD/USD.

The USD has soared from the low of 10,363 in mid-June 2014 to 12,162 in mid-April 2015. This week's breakout represents the end of a great 17% run-up in USD strength, and the last couple of months turn out to be volatile as the USD was kept in a range of 11,958 to 12,162. On hindsight, the last 2 months represent the peak of USD strength.

This would mean that there is merit to the FOMC's claim that decrease in non-oil imports is transitory. The only remaining unknown is whether it is right to assume that once winter has passed, the economy will start to operate back to its potential. It should be noted that the US grew by a mere 0.2% in the first quarter of 2015.

This is better than the -2.1% contraction in the first quarter of 2014. If we were to extrapolate the 2014 growth trajectory, then 2015 should be another bumper year for the US. However, the market is still on a wait-and-see attitude regarding this.

On the bright side, the FOMC noted strength in consumer confidence and that unemployment continued to hold at 5.5%. This would mean that the Fed is not going to follow on the footsteps of China and ease monetary policy. This would mean that the Fed is also going to adopt a wait-and-see attitude and allow data to shed more light on the actual economic performance. This would provide it with the basis for further expectations of the US economy.


We would know more about the April FOMC meeting from the release of its minutes on May 20, and the next FOMC statement is not expected until June 17. Along the way, there will be the nonfarm payroll data on May 8 and retail sales data on May 13.

The UUP has broken out of the lower range of $25.25 with the bearish April FOMC report. The USD momentum is now bearish, and unless there are strong economic reports, the USD is unlikely to reverse its bearish tendencies until the June FOMC meeting.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.