Currencies remained volatile in the past several days, with some of the action attributed to “expected” steps by the FED. The central bank will hold its regular policy meeting in the coming week and many traders have been already trying to predict what the policy makers are going to do. Just as it has been the case for a long time, interest rates are not in focus – virtually nobody expects to see changes in this department. Instead, market talk is centered on tapering of the QE or withdrawing of the additional liquidity that the FED was injecting in markets during prior few years.
Clearly, much like the quantitative easing, its tapering will have an effect on all financial markets. The question is: what effect and how meaningful? Obviously, of most interest to us is reaction of the US Dollar. Unfortunately, at this point, this process is largely academic, or even an exercise in frustration, in spite of what financial media would have us to believe. For all the talk about QE withdrawal and various opinions of “experts” possible reaction of currencies is no more than a guess and not worth speculating about.
That might change once the FED actually starts doing something in that direction. Once we see the scope and potential time frame of tapering, than we might start to develop an educated guess. Reaction of the Dollar after the first actual step from the central bank, will provide valuable clues about what is likely to happen in the future. We must remember that this operation will not be an event, but rather a process lasting years, with many twists and turns. So far, there is only talk and no evidence about it even starting. Risking money on its outcome is, at least for the moment, irresponsible or even foolish.
One of the trades discussed on these pages has finally come to conclusion last week. More to the point, I closed it, before it reached the objective. I am talking about the GBP-CHF, sold at 1.4495. Using 4H chart, it was reasonable for the trade to take some time, but the price action was, well, ugly. While it moved in the anticipated direction, its frequent and strong bounces made it difficult to stay in this position. In the end, I closed it for 100 pips gain and moved on.
The New Zealand Dollar rebounded impressively in the last few days, recovering almost 400 pips from its low of 0.7759. From a long-term perspective, this is only a corrective bounce (for now), but looking at the hourly chart, it is a large move and perhaps a little overdone. We can see a possible head and shoulders pattern emerging here, even if not fully developed yet. For that, the price must establish the right shoulder, while the potential neckline might already be visible. Now the NZD-USD must advance slightly, forming a distinctive minor low, which would become the sell point. If the price unfolds in this way, this could lead to a trade targeting quick 60-70 pips.
The Kiwi was not alone, as all of the commodity currencies rebounded last week. For example, the AUD-CHF jumped to as high as 0.8912 from 0.8646. If this strength continues, I would like to buy the AUD-CHF just above the latest minor high. The buy order is at 0.8920 and should the current situation prove to be a reversal with some staying power, I will look for a rally to about 0.9100. In addition, opening gaps are always possible in early trading and could offer opportunities if formed. Have a great trading week!
Mike K.