AUD,NZD/FXWW News/GBP crosses/JPY crosses/Others/Trade Ideas

How to trade the FOMC event

I know that my view is not shared by everyone, but with the Fed likely to implement some QE tapering, or at least more strongly telegraph it (excellent article on the subject from Nomura), this is how I think the market will react. I’m basing my views on recent market moves, especially what happened in the FX market last week when a big global macro fund started dumping positions across all asset classes.

  • Aggressive tapering by the Fed will have a big impact across all asset classes and encourage macro and hedge  funds to exit positions built up over many years. We will see panic selling in certain markets, gold will fall back towards $1250, and the risk trades like AUD/JPY will fall hard. USD/JPY will fall towards .9350 and AUD/USD will test lows at .9325. The CHF will outperform whereas the GBP will underperform, in the very short-term at least. In this scenario GBP/CHF could be trading near 1.4100 and AUD/JPY near 87.00.
  • A timeline is set for gradual tapering; then we will get a much reduced version of the above and in fact we may not get too much reaction at all. I sense that the market is prepared for this scenario.
  • No change at all and no mention of tapering: This will see the risk trades like GBP/CHF and AUD/JPY rally hard, maybe 1.46 and 93.00 respectively.

That’s how I see the world and I think that quick cross traders might get some excellent opportunities after the event.

  1. Great post Sean. It makes me wonder though.

    Should the move to taper set off a positive feedback loop selling US Treasuries, significant changes to the performance of recent ‘risk off’ assets (in particular US bonds) would seem likely. In which case, with a significant fall in equities, would it not require the Fed to reverse its taper and return to extraordinary monetary policy?

  2. That’s what I feel will happen eventually James. The US economy will reverse sharply without the free-spending ways of the Fed and ultimately the Fed will have to turn the tap back on. Kick the can down the road and hope we’re all dead and buried when the system collapses. Sophie’s choice! I’m joining the supercyclebear club 🙂

  3. Hi, Sean, Thank you very much for sharing your precious experience and idea! I’ll abandon the sell order of EURUSD and try to seek some better opportunity in GBPNZD and EURCAD instead. Last time short at 2.0 GBPNZD just for 20 pips by mistakenly operated……ai……

  4. Think it’s safer Yue, rather than having a set position in one of the majors I’d look for volatility in the crosses immediately after the event

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