Thursday, July 11, 2013

Why do Fed minutes often contradict its actions?


It is not normally the job of a central bank to manipulate the value of its country’s currency. But it is its job to moderate the decline (or appreciation) of a currency if fundamental factors change that might give rise to such movement.

This is the best way to interpret the minutes of the last Federal Reserve meeting which were released yesterday and the remarks made by Fed chairman Bernanke during the question and answer session after a speech he gave to the National Bureau of Economic Research Conference, also yesterday.

The US dollar is going up in the medium to long term because QA is coming to an end, and the main concern of the Fed now is to make sure that this is an orderly process. Thus the Fed minutes and Mr. Bernanke’s comments have led to a temporary fall in the US dollar, to somewhat offset its rise of recent weeks.

The same goes for the Aussie dollar. It has fallen precipitately since last month and the efforts of the Australian monetary authorities now have to be to make sure that, while a weaker AUD is in fact desirable, that this does not happen all at once.

There has been a rapid decline in the value of the Aussie against the U.S. unit. This has now halted, at least temporarily, and there should be a retrace. The extent of this will be affected by the significant resistance level that exists around 0.9380, as can be seen in the monthly chart below.

 Below is the daily chart of this pair, which gives an even better impression of where this resistance is in relation to the current price.

The efforts of central banks to moderate movement in currency rates, while it does indeed result in somewhat orderly changes when seen, for example, on the weekly and monthly charts, can give rise to significant bi-directional volatility on shorter scale time frames (we find it necessary to distinguish between bi-directional and uni-directional volatility for trading purposes).

Individual traders should refrain from betting on the retrace discussed here as it will be very much a counter-trend move. 

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