50 pips Profit on FOMC Statement

The FOMC announcement showed that the policymakers are starting to think about the possible options in order to wind down the accommodative measures when the economy resumes its growth. Referring to the purchases of mortgage-backed securities and housing-agency bonds, the Fed said that it “will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010”.

Stocks dropped and treasuries rose in response to the decision and it was when I decided to bet on rising risk-aversion by buying the yen. I sold eurjpy and the trade finally resulted in 50 pips of profit in almost 6 hours. The following charts show the market reactions.

Case Study: FOMC Rate Decision

“The pace of economic contraction is slowing,” the Fed said in a statement after its meeting. Treasuries declined after the Fed disappointed investors by not increasing its $1.75 trillion bond-purchase program, and stocks pared gains.

I had a long position on eurusd but I decided to close the position in the european market as soon as I detect the bearish signals from the technical data, more clearly in the hourly chart.

Profit from the RBNZ Rate Reduction

On Jan 28, the Reserve Bank of New Zealand (RBNZ) cut the cash rate by 1.5 percent to 3.5 percent. It was 0.5 percent more than average estimates. I made 84 pips of profit by selling nzdjpy after the FOMC announcement and less than 30 minutes before the RBNZ rate decision (I closed it about 15 minutes after the announcement). I made also profit from selling audusd but the position closed before the announcement.

FOMC Becomes Less Understandable

Federal Open Market Committee leaved its target for the federal fund rate unchanged. However it seems that investors found it difficult to anticipate the future actions. Quantitative easing policies were expected, especially buying the treasuries, but the statement gave no clues about when it would be started. Dollar and yen pared their earlier losses as the uncertainty started to dominate the financial markets.

EURUSD A Day before the FOMC Meeting

The chart shows reactions from the eurusd on Jan 27.
- German import prices fell more than estimates
- IFO survey came better than expected, thank to the optimism about newly announced German spending plans.
- Euro-zone current account deficit widened in November.

FOMC will probably leave the target rate unchanged (zero to 0.25). But I think playing the FOMC rate decision is not an easy game; because:

- It is not a rate cut meeting
- Investors know the most probable message which the FOMC is likely to send (aggressive easing)
- German CPI figures will be released gradually before the meeting
- Obama's stimulus package would be discussed in the Congress as soon as tomorrow

For now, I think it may be better to wait for managing the U.S. GDP data on Friday.

Dollar's Days!

Dollar continued to appreciate against all major currencies:

Euro-zone: Euro fell nearly 2 percent against dollar, touching 1.5005 and extending its weekly losses close to 4 percent, "the most one-day drop since September 2000". Selling euro accelerated after Trichet's comment on "materializing" risks to the growth, in addition to weak economic data from the euro-area.

UK: British pound followed the same scenario even after policymakers decided to keep the interest rate unchanged. Nationwide consumer confidence declined and HBOS home price index dropped when falling oil (and other commodities) prices strengthened this view that the MPC could finally get the flexibility to cut interest rate.

Oceania: Both Australian and New Zealand dollars extended their losses when having even more reasons. In addition to weak economic data and recent comments from officials on the possibility of interest rate cuts in the near future, these so-called commodity currencies had no choice but depreciation as a response to the sharp decline in oil, gold, copper, and other commodities prices.

Oil: Today's 116 $/b oil may looks relatively cheap and it might be the most important reason behind the dollar's strength and also the rally in stock markets. According to the Bloomberg's analyst, "the decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

However there are people who believe that such reaction is mostly technical than fundamental. For example, falling euro below its 200 day moving average (around 1.5227) could have triggered euro-selling orders and resulted in a faster depreciation.

As a summary I want to quote an analyst's view from the Bloomberg: "The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. "None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

Selling GBPUSD Ahead of US GDP

About 3 hours after FOMC meeting I think it has been mostly priced in the market. I decided to buy dollar against British pound at 1.9745 and increase the size if technical data become more supportive.

(The Blogger was inaccessible at the time and this post has been added later)

FOMC Statement and Market Reactions

FOMC decided to keep rate unchanged, in line with expectation. It is some highlights from the Bloomberg:

• "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased"
• "The Committee expects inflation to moderate later this year and next year"
• "However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high."
• Dallas Fed President Richard Fisher dissented from today's decision, preferring an increase. He dissented against the rate cut at the April meeting.

Some analysts see this statement relatively balanced. I still think the dollar buyers could outnumber the sellers from now regarding the increased possibility of raising interest rate. There are also some supportive data in the short term; GDP is to be released tomorrow which is expected to be revised higher. At the same time the economic weakness in some other countries such as New Zealand and Britain could be more pronounced from upcoming data.

(The Blogger was inaccessible at the time and this post has been added later)

25 pip loss, but from a small position

The position (buying EURUSD) closed at 1.5545 in 25 pip loss. I wanted to close it before ECB's Trichet speech (at 10:30 CET) but I came too late. The next play would be probably after FOMC meeting.

Buying EURUSD; Opening another front

I decided to go long on Euro against dollar, buying EURUSD at 1.5570 when the pair hit its 14H moving average, based on the same reasons mentioned before.

Selling Dollar; Taking position ahead of FOMC Rate Decision

Consumer confidence, housing and manufacturing data all came weaker than expected. US stocks are in green territory now, betting on that Fed is not in a position to raise rate at least now.

I still think that there are more dollar sellers before tomorrow FOMC minutes. Durable Goods Orders and US Existing Home Sales both are due to release tomorrow, both are expected to add more concerns about the economy, making it even easier to sell dollar.

I have started to make my position. Selling USDJPY looks technically an option. I sold it at 107.84. However the best option seems to be EURUSD knowing that German CPI is ahead but I wait until technical data improve in coming hours.