This text is from blog famous currency strategist Joel Kruger .
NOTHING CHANGES – Some wild moves in the market following the latest Fed action. A new round of open ended MBS purchases, an extension of low rate guidance through mid-2015, and a pledge to undertake further QE and employ more tools if the labor market failed to pick up substantially, have been the primary catalysts for the fresh wave of broad based USD selling. Admittedly, I did not expect to see such aggressive action from Mr. Bernanke and company and it is no surprise to see this initial reaction in light of these moves. Nevertheless, absolutely nothing changes as far as my outlook is concerned, and I still am looking for a major currency sell-off and bullish US Dollar reversal over the coming sessions.
Daily forex technical analysis video by Joel :
WHAT DOES ALL THIS REALLY MEAN? – The aggressive move by the Fed only serves to highlight the fragility of the global economy, and these actions should translate into similar moves from other central banks around the globe. The net effect will be an offsetting of any US Dollar weakness from the latest round of Fed QE, and a resurgence in market panic and uncertainty as fears over the health of the global economy intensifies. This time around, currencies like the Yen and Franc will refuse to accept additional bids, and flight to safety bids into the Greenback will be the only flight to safety play. This time around, it will be China, the commodity bloc and emerging markets that are exposed, and we can expect to see a rapid liquidation in these higher yielding risk correlated currencies.
HOORAY FOR QE STRATEGY – The “hooray…more QE..let’s buy equities” strategy has worked until now, but the lure of this strategy is far less compelling than it once was. The implementation of additional monetary accommodation is a necessary step to help cure an ailing economy. The key point here is that this is an “ailing” economy. At one point when equities were a good deal lower, I could understand the attractiveness of taking advantage of the cheap money and compelling valuations. But now? US equities are approaching levels of just 10% off the 2007 pre-crisis record highs! How can we have equities so close to record highs at the same time as the implementation of the most aggressive monetary policy accommodation ever seen. It just doesn’t add up. So where can we go from here?
THAT’S GREAT JOEL….SO WHAT DO WE DO? – Looking at EUR/USD, we should start to find some solid offers above 1.3000 where there is some formidable previous support now turned resistance. Short-term technical studies are well overbought, and the risks for additional upside are limited. That being said, we need to be thinking about where the move could extend, and a quick fib analysis of the 2012 high-low move shows the 78.6% fib retrace coming in at 1.3180. So yes…it is possible that this run continues towards 1.3180 over the coming sessions and we need to factor this in. But overall, selling this rally above 1.3000 should prove to be a profitable strategy over the coming weeks and one that I will be looking to take advantage of. Similarly, selling the other major currencies against the buck should also prove to be highly lucrative. Just make sure to position accordingly as there is always scary, resolve/conviction testing price action. One final note…..things are still really bad in the Eurozone and getting even worse in China…just wait for the attention to shift back over.