Today’s meeting of the Federal Reserve turned out to be the most eventful of the year. One could say it is a little surprising, deep in the Christmas season, but currencies burst with activity once the statement was released. Perhaps markets overreacted to some degree, but it only underscores just how much traders wanted to see some kind of action from the central. In this regard, the meeting was not disappointing, even if steps taken by the FED are symbolic, at least for now.
The much-vaunted process of withdrawing liquidity from the financial system is still far in the future, but the Federal Reserve committed to a slowdown in its purchase program. In other words, the “taper” has begun, if slowly. The FED will reduce its asset buying by $10 billion, to approximately $70 billion a month, with possibility of additional $10 billion taper at each following meeting. Under this scenario, this current round of Quantitative Easing would run its course sometime in 2014. There are some conditions attached, like the unemployment rate below 6.5% and inflation preferably closer to 2%. Of course, there is no guarantee of future action, but currencies responded as if the QE was already history. The US Dollar rallied broadly, having one of the best days recently, but we need to wait and see it this is a lasting rally or only a knee-jerk reaction.
Among the worst affected were the commodity currencies, which made me to cancel the EUR-CAD sell order discussed yesterday, at least for now. On the other hand, I liked the interplay between the Australian Dollar and the New Zealand Dollar, covered here a while back. I decided to buy this pair, with entry at 1.0753. Risks are small and my objective is roughly the 1.10 handle. If this trade takes a long time to reach the target, I will probably lose patience and get out before. For now, though, I am bullish here.
Mike K.