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Volatility a Day Ahead of FOMC Gives a Sense of Volatility and Breakout Threat
Written by article default Wednesday, 03 November 2010 12:26
We are now within the 24 hour countdown to the Federal Open Market Committee's (FOMC) rate decision. It is not a stretch to suggest that this has been primary catalyst for the dollar's losses over the past two months; and the concurrent boost in investor sentiment during this period can likely be traced back to the same source. However, that said, we have seen the market work through the probable scenarios to this event so thoroughly that the prices already reflect a consensus outcome (monthly $100 billion injections for five or six months). This does two things. It sets the bar through speculation and it leverages the market's sensitivity to nuance alterations in the outcome. Through the first issue, we should think back to all the adages we hear floating around the market and land on "buy the rumor, sell the news." Speculators attempted to price in the outcome early to get ahead of the market. When they see their position vindicated they may look to take profit (a stronger stimulus effort could just keep them in for the ride). Also, since the market has a general expectation for the shape of the program, smaller changes will have an outsized impact on price action (this is particularly true for "disappointments"). All this boils down to a high potential for volatility, meaningful breakouts and trend development.As for my current positions, I see two of my positions from yesterday have hit stops - that is the risk in holding a short-Aussie position across the board ahead of significant event risk. That RBA decision certainly was surprising. Having gotten back into a EURAUD long after taking a first target on the previous position; I had the good sense (rare from me in aspects outside trading) to take a further reduced position in recognition of the forthecoming event risk. My stopped AUDNZD short actually hit my trailed stop that was up to breakeven. This left me with limited profit on the first target; but that is better than nothing or a loss. What remains is my AUDCAD short. This is less sensitive to risk trends and the FOMC; but it will still answer to dramatic swings in investor confidence. My stop is at 1.0175.
My active trades list is anemic; but my potential trades column is loaded. I'm particularly interested in the US dollar. Through that, I think EURUSD and GBPUSD have the best potential for short-to-medium-term breakouts and moderate trend generation. For EURUSD, I am watching for performance around 1.41 and 1.37 (looking for confirmed breaks or reversals); and GBPUSD is interesting above 1.61 or below 1.59 and 1.57. If we are talking long-term trade potential through significant fundamental shifts, I'm more interested in USDYEN and USDCHF. They Japanese yen and Swiss franc have appreciated across the board on dubious safe haven appeal (when risk has actually risen) and are therefore likely speculative in nature. These trends will soon give out. Elswhere, I am keeping my eye on AUDUSD for a possible failure and reversal from parity; CADYEN in a possible break below 78.50 and EURYEN for a break of its wedge between 114 and 111.50.
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