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.