Wednesday, February 12, 2014

Is tapering priced in? | Trade thoughts: Aussie / Kiwi (AUDNZD)

The consensus among the various commentators of things market related seems to be that Janet Yellen (pictured above at the event) did not put a foot wrong in her presentation to members of the US Congress yesterday, and in her handling of questions afterwards.

The big takeaway is that tapering of Quantitative Easing (QE) is now a done deal before the end of the current twelve months, barring some very significant economic shock. It is our belief that tapering has actually been priced into currency exchange rates and is no longer a factor that can be used as a basis for trading. Alternatively, the fact that the Federal Reserve is at pains to emphasise that interest rates will be kept low for the foreseeable future makes it (tapering) almost totally irrelevant.

At the same time the equity indices seem to have recovered their mojo and emerging markets are no longer in what has been termed turmoil. The Turkish Lira against the US dollar (USDTRY) chart is shown below. Although the TRY had been steadily losing value for some time, it was only in the last two weeks of January that this qualified as turmoil, triggered by some less than stellar economic reports out of China. This in turn provided the cue for the equity indices to have their long overdue correction. However, as can be seen, USDTRY is now coming back to something approaching normality.

Trade thoughts: Aussie / Kiwi (AUDNZD)

Regular readers will know that we classify a trend as a series of higher highs and higher lows, for an uptrend, and lower highs and lower lows for a downtrend. The four hour chart of AUDNZD shows the formation of just such a pattern. The fundamentals of these two pairs would also indicate that the recent upward movement might be due to come to an end. We highlighted them here.

There is one update since then in that the Reserve Bank of Australia has gone from an easing (tending to reduce interest rates) bias to one of neutrality. This might not be enough to change the basic relationship between the two currencies and the long term trend is still very much to the downside.

We have placed a conditional (pending) order which is set to trigger if the price falls to the rate indicated by the ENTRY line. A Stop Loss (SL ASK) has been placed at the level shown, which is associated with the pending order. If price goes back above this level before the trade is taken, in other words before price falls to the ENTRY line, the Silver Trigger routine, which is running in the background, will abort the whole trade. This will happen even if yours truly is deep in Slumberland, which he is likely to be at the time when the markets are in full flight in Wellington and Sydney.

Important disclaimer: None of the commentary here constitutes investment advice. It is for educational purposes only. There are many countervailing views on the way the market might move and no one, not us or anyone else, can foretell the future. You should only trade with money you can afford to lose. It is important that you make money management and the control of risk the cornerstones of all your trading activity.

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