my thoughts on the upcoming FOMC's Taper decision...
**Feel free to comment what You think. Which scenarios mentioned below do you think is most likely to happen?**
Finally, the event that most traders have long awaited. Many speculations and rumours regarding this decision has been rampant. I have read a couple of articles and here is what I have understood.
There are expectations and fear surrounding the USD's reaction to this decision.
The FX market, being a forward pricing market, may have already priced in what everyone expects - a $10 billion to $15 billion cut. Meaning to say the Taper is definite. There will be no surprise. However what no one really knows and what everyone is eagerly waiting to hear is... How Much is it gonna be?
Here is what may happen...
First scenario: a cut of $10 billion or Less - USD bearish
This would pave the way for risk-on trades. Aud and Nzd along with Gbp and Euro rallies against the USD.
In my opinion, this is Very Unlikely to happen. The Fed will need to show that they are committed to removing stimulus by mid 2014 just like they said. If the cut is seen as weak and uncommitted, the Fed will loose its credibility.
Therefore, a USD Collapse is Not gonna happen.
Second scenario: a cut between $10 billion to $15 billion as expected and a reassurance that more will come gradually.
This would be the most difficult outcome to account for. Why? Because as mentioned earlier, markets may have already priced this in.
Hence, the immediate reaction to the USD may be muted. After some high volatility, markets may settle but will eventually be USD supportive, in the long-run. The status quo remains and everyone will start guessing what is next?
This outcome would also mean that after the news, markets may drift sideways awaiting the next key catalyst. Risk could also stay supported and Aud, Nzd, Gbp and Eur may trade in a larger range within their prevailing trend.
Nothing major happens in the Market, till the next FOMC meeting.
I feel this scenario is highly probable...
Third scenario: a $15 billion or greater cut along with a firm commitment for more cuts to come every month.
Needless to say, this would be the most supportive scenario for a USD rally across the board.
The 'Moral Hazard' of taking excessive risks with cheap money will come crashing down. This is where the world will see the USD's potential as a safe haven. The USD will rally... at last !
I am hoping for this third scenario. Probably being over ambitious but I am committed.
I will be going into this Event Risk possibly holding onto my Aud/Usd shorts... if I am not stopped out.
Risky, but calculated Risk.
Also looking to Sell some Gbp/Usd soon.
any thoughts?
