Why I'm Buying USDs if the Fed Holds and Selling USDs if the Fed Hikes


THE OUTCOME - There is no way of knowing what the Fed will actually do when it decides on policy later today. We know the market is only pricing a 30% chance of a hike, though I believe the Fed should just go ahead already and get on with it. When you break it down, what difference does it really make? The Fed is on course for its first rate increase since 2006 between now and end of year. So whether it moves now or over the next 3 months is really inconsequential. The important thing to consider is the Fed will in fact go ahead with a tightening very soon and what this means for markets and the US Dollar.

WELL SAID - But for today, I think there is an interesting strategy that we should apply, which could prove effective. I am reminded of something I recently read which perfectly describes speculating in markets. I read that price moves a lot more than value. This is so true and so well said. As speculators, we are always looking for opportunity. We look to take advantage of price movement that deviates away from underlying value and rely heavily on this fact. The greater the volatility the better, as this only means the market has that much more of a chance of swinging away from value. And so, when we look at today's Fed decision, there is no denying the potential for volatility and major price moves. So what's the play?

THE STRATEGY - If the Fed goes ahead and leaves rates on hold as expected, look for an initial move against the Buck as the impact of the rate hold triggers less favorable US Dollar yield differentials. But I believe such a move will be a misreading by the market, with the on hold result only leaving the Fed warning of imminent rate hikes and putting the focus back on a path to tightening. On the other hand, if the Fed surprises with a rate hike, there will unquestionably be an initial US Dollar surge as rate differentials jump in the Buck's favor. But this move should also be faded aggressively, as the Fed will more than likely offset any hawkishness from the hike as it outlines a very slow and steady path to policy normalization.

We take advantage of the fact that price moves more than value. Via @joelkruger

THE PROXY - So which currency pair should we use as our proxy for trading today's event risk? I think it might be best to use AUDUSD. Aussie correlates well with all the fundamentals above and so, it makes the most sense to me to trade this pair. The Euro has been doing some wacky things of late, specifically inversely correlating with stocks. The Pound has been outperforming on its own data and has fundamentals that are too similar to the Dollar. And the Yen and Franc are far less reliable and more one dimensional. Aussie is the most liquid of the commodity bloc currencies and so, it makes sense to me to use this pair as a proxy. I will keep it conservative and say I will be looking to buy an AUDUSD dip down around the 0.7000 area and will look to fade a rally up around 0.7300. Stand by and I will provide additional updates today if something sets up.


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