Day three and Chase gives us his view on the little talked about subject of the FOMC.
You can revisit his previous days here and here.
The proper way to prepare for the FOMC
Hi everyone, and welcome to day 3. It’s the middle of the week, so I thought I’d talk about money management.
Just kidding. Welcome to the Taper-tastic Special FOMC Edition!
I’m not sure if it’s fair to call today’s FOMC meeting and presser over-hyped, since we’re all so jaded to the whole show by now that almost nothing would surprise us. That said, this meeting holds a special place for me, because the taper trade is all I’ve known.
The Fed’s QE measures have been a feature of markets since just after I first put money where my mouth was. And I’m keen to be done with it. I know we’re a long way from there, but I’m hoping for at least a sign.
There’s been some great commentary today about possibilities for the outcome of the meeting tomorrow, so instead of explaining the whole thing I thought I’d just give a little summary. Then I’ll tell you what I plan to do about it.
- Kathy Lien has a great article on four scenarios for the outcome of the FOMC meeting, which gives a good high level view
- Adam makes a good point that the market reaction will be volatile, but not necessarily long-lasting
- MarketWatch has an in-depth piece on 5 questions the Fed might answer besides the taper
- Citi pointed out that, in the event of no taper, Ben is likely to give some kind of guidance at the presser, and so the dip might be a good time to scoop up some cheap USD
I know we all understand it, but I’m going to tell you about it anyway.
One of the problems the Fed is acutely aware of is the state of the “real” economy. The massive stimulus hasn’t quite filtered down in the way they’d hoped it would. Banks are lending, businesses are borrowing and growing (their share prices), but they’re not necessarily growing in ways that benefit anyone besides shareholders, or committing to big personnel investments.
There are many other concerns – the participation rate, the number of contract or temporary jobs padding the official figures, and so on. Hopefully these will be addressed at the presser. But the one thing I feel we can expect from Ben is what Adam pointed out yesterday in the MarketWatch article
“Whatever is done, Bernanke’s going to take the other side of the argument,” …. If the Fed does not begin a taper, Bernanke is expected to signal that a pull-back remains very much on the table … if the Fed does taper, Bernanke is expected to insist that the Fed is in no rush, a taper is not on a present course”
The press conference, or the few minutes after it, is when we will have the best chance of getting clear market moves that will set the direction for the rest of the week. Or at least the day. The initial reaction is likely to be faded unless it is way out of line with expectations. Liquidity is thin, and the potential for oversized yet ephemeral moves is alarming.
The last thing to remember about the presser is that Ben doesn’t really want to hamstring a Santa Claus rally – the market expects it and relies on it, and is also so spoilt it will throw a tantrum if it doesn’t get it.
Before I get onto my scenarios, I only have one other point I want to make: We hear a lot of talk about the market pricing in the taper. Some markets might have. Stocks haven’t. I can think of a few currencies, too.
EURUSD-Daily
Gold, on the other hand, seems to know what’s up:
gold-4hr
Now there’s an asset nobody wants.
In my humble opinion, the “market” hasn’t priced in anything except uncertainty. There are now so many variables to the situation, and so many possible outcomes they could create, that the picture is very difficult to make out.
So I made a table of the most common scenarios, and what I will do if each of them plays out.
The main thing I’m interested in is the chances that the initial algo-bang will reverse, or whether it will continue. I’ve tried to gauge that chance as best I can. The “probability” of each event happening is just a combination of those I’ve seen thrown around.
So that’s what I’m looking at. I usually keep away from high profile events, and I am currently short GBP/USD, though the stop is at break even. My AUD/USD short hit its target today (nice one, Chase), and my USD/JPY long was trailed out at break even, so I’m going in with my powder fairly dry.
The main FOMC trade I’m looking at, believe it or not, is NZD/USD. I’ve actually done something I seldom do and placed a buy stop, which you can see here:
The Kiwi has been quietly bid for the last few months, despite some setbacks. This 3-shouldered freak has formed a kind of rough bull flag, and I like a break to the upside for some real continuation – at least up to 0.8500.
General commodity-bloc and EM malaise has kept a lid on things for now, but if the dollar really starts to go boobs-up we’ve got an inherently strong currency that isn’t near multi-year highs.
I’m also looking at EUR/USD:
Deep down I’m a terminal dollar bull, but I know better than to let this lull me into picking a top in this monster. But I will trade what I see, and what I see is a trend line.
EURUSD-4hr
I’m not placing a buy limit, but if we get to (or through) that line and bounce like a yoyo by the end the Bearded One’s presser, that’s about all the sign bulls will need to take it and run.
It could take a few days to get back to 1.38 and maybe even another few to break it (or, like, 15 minutes), but if the outcome is USD-positive and bears can’t hold it below 1.3500 even for half an hour, we’re probably going the other way.
That dotted white line we’re at, by the way, is the 61.8% fib of the 2011 high to 2012 low. It would be a great place for the party to end. But I wouldn’t play a break of the trend line. If Ben catches the market flat-footed and sends equities into a tailspin, there are better places to play dollar strength.
USD/CHF:
USDCHF-4hr
Although I’m beginning to think it will take EUR/CHF at 1.200 before this pair can rally, there are a couple of possible trades here.
- If the reaction is immediately dollar positive and continues to look that way, the best way I see to play this is buying a break and retest of the descending wedge top at 0.9050-ish, and targeting the 200 Week moving average, which is this pair’s Iron Curtain.
- If you’re bearish, the 100DMA and this wedge top is a great place for a low-risk short, and this might be an excellent play if there is a small taper and the buck spikes up before Ben bombs the microphone.
- On the other hand, a spike lower into 0.8750 on no taper might just find enough buyers when Ben speaks, especially if EUR/CHF gets close to the floor. Now that would be exciting.
AUD/USD:
No need for a chart – a break of 0.8850, followed by a retest and failure here (which might take a couple days) would be an ideal setup for a short.
USD/JPY:
- I’ve avoided USD/JPY because the picture is murky, and I spent some time on it yesterday. On the one hand a taper would be dollar positive, but negative for stocks. The Nikkei has been looking sickly today*(* Editor – assumed written Tuesday), and I don’t like it.
- I don’t like selling a break lower. The trend is up and we haven’t even started to form a decent consolidation pattern yet.
- A big dip could be a chance to buy, but a spike low is by no means a swing low and it could be a while before we see 104.00 again if the dollar gets a serious beatdown.
- If we get a taper and some very clear guidance, then this could tip that balance and it won’t matter what investors think of Japanese stocks. The action in the hours following the event will tell us whether the market has really picked a direction. The trick in seeing it is just to zoom way out.
So that’s it folks. The forecast is cloudy, with a high chance of whipsaw. Buckle up, and be safe!
Chase
