AUD/JPY: Fed Minutes Weigh on the Aussie

The Australian dollar is foreseen to give up further ground alongside the Japanese yen today as the minutes of the Federal Reserve’s latest meeting suggested that policymakers are increasingly divided about the downside risks of their bond-buying, raising the possibility of an early end to its stimulus efforts. Meanwhile, analysts deem that the Japanese economy will perform better in the coming fiscal year earlier than expected.

According to the minutes of the Fed’s January meeting, some officials have expressed growing concerns that its easy policies could stoke inflation. As such, the Federal Open Market Committee agreed to review its $85-Billion bond-buying program when they meet next month. A considerable number of Fed officials have expressed concerns about potential costs and risks arising from further asset purchases such as inflation and market instability, indicating growing wariness of the hazards of expanding the Fed’s balance sheet. The minutes say that a number of participants wanted closer scrutiny of the efficacy, costs and risks of the asset-purchase program as they are concerned that the risks could now outweigh the benefits.

The Fed is buying $85 Billion a month in long-term Treasury bonds and mortgage-backed securities to hold down long-term interest rates and encourage the purchase of homes, cars and business equipment. The Fed has previously stated that they plan to continue the purchases until the labor market improves substantially. Nonetheless, some policymakers said that an evaluation of the program could prompt them to alter or end the purchases even before the job outlook gets substantially better. With the emerging split among Fed officials have revived concerns over the possibility of an early end to stimulus, US stocks markets, with the S&P 500 posting its worst session in over three months. Asian bourses have also slumped in early trading. With market sentiment on a low, the Aussie is apt to weaken.

Meanwhile, the Yen is apt to find support from a Reuters poll which revealed that analysts hold a more optimistic outlook on the world’s third largest economy. An export recovery helped by the weak Yen and improving global demand are likely to help the Japanese economy to perform better in the coming fiscal earlier than expected according to analysts surveyed. The economy is deemed to grow 2.1 percent in fiscal year 2013-2014, the poll found, up from 1.8 percent last month. Considering these, a short position is advised for the AUD/JPY trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.