Thursday, April 10, 2014

Equities meltdown and Forex | FOMC minutes, interest rates and the fate of the US dollar

The news from the Wall Street close last evening was not good. The NASDAQ was down 3% on the day and the S&P, which is the standard measure for the strength of equities, was off over 2%. This is on top of what was perceived to be a sizeable correction in January / February of this year, although the market bounced back on that occasion.

Along with a reported rush of cash into equity funds in the last week, which could be the kind of contrarian “exhaustion” buying that many professionals perceive as marking the very top of a cycle, these are the kind of volatilities that can be the forerunner of a serious meltdown.

So the question is: How will all this impact on the Foreign Exchange market? The answer is: Not a lot. In Forex trading, there is nothing like the same distinction between going long (buying) and going short (selling) as there is in equities. To short a stock, it is normally necessary to have a friendly broker who will loan you the shares you wish to sell, as you do not own them, but you would nevertheless like to dispose of them so that you can buy them back at a cheaper price when your judgment that they were about to go down proves to be correct.

With Forex, there is no such requirement. “Shorting” a currency pair means nothing more than deciding that you will use one or other global currency to deal in a position in another, and you can choose to buy or sell the pair at will. The arrangement of the currency pairs owes its existence to nothing other than convention.

One buys long and sells short. Since its inception, OmiCronFX has been doing both as a matter of course in the currency pairs in which it trades, as dictated by the Fundamental and Technical Analysis research it carries out, and then using its algorithmic routines as the power tools to enable it to do so efficiently and to manage the trades once they are in place.

So the good news is that the OmiCronFX methodology is totally indifferent to the Foreign Exchange market direction of any particular currency.

FOMC minutes, interest rates and the fate of the US dollar

So, the minutes of the last FOMC meeting have been released and the market has taken the contents as a confirmation of what it should have already known - that interest rates in the USA will not be raised anytime soon. 

There had been some confusion because, at her last outing to Capitol Hill, Janet Yellen, the Fed chair, was asked a question she was not specifically prepared for. This was about when interest rates might be raised after the end of Quantitative Easing, which is scheduled to be tapered fully out of existence by the end of this year. In reply she said: “…about six months”.

Those three words have been dominating market action since then, creating an almost psychotic condition in the minds of participants, particularly as far as the Greenback is concerned.

In the meantime the Fed is watching the trend in economic indicators, as opposed to individual data points that are released weekly or monthly, short term bonds are being sold and yields are rising, emerging markets, which had a windfall of capital inflows when QE started, have suffered the trauma of seeing that process reversed, and equities have started a serious meltdown (sorry – correction). Oil prices are stable and oil price volatility is lower than it has been for very many years.

Each and every one of those things points to a strong US dollar, eventually. As usual, the market will make sure that it does not achieve its destiny in anything like a straight line on the chart.

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