THE FED SUSPENSE

 A taper of $5, $10, $15, $20 billion, it doesn’t matter. The market will instantly draw it’s own conclusion on the release of the taper number but it the real direction will come on the explanations. If it’s tapering because he spins a yarn of a good US recovery the buck goes North. Even the low $5bn number will likely reverse any dollar sell off if he plugs a recovery. As I said before and during the Non-farm week he hit the jackpot with a string of good data. He’s got the ammo to push tapering for economic reasons but we’ll have to see if he’s strong enough to convince the markets.

Like Europe and the UK, he also has to dampen rate expectations and herein lies the problem with forward guidance. At times the market is a very simple creature. It knows rates go down when an economy needs stimulating and it knows rates go up when an economy is doing well. It’s that simple. It’s like saying the sun comes up and the sun goes down.  Trying to tell a market that rates are not going up on economic positives is a thankless task and Bernanke will have to turn it right on to convince the market not to get carried away. This might put some initial pressure on the dollar but I think it will be fleeting.

So in my mind here’s what I think we may see.

1.       $5-10bn taper based on improving economy. Emphasis on adjusting QE either way should economic data improve/not improve. Heavy dampening of expectations. Makes QE ultra adjustable month by month. Reaction – USD down initially before bouncing. Stocks fly.

2.       $15-20bn taper, Will again be based on supposed good fundamentals, adjusting either way, heavy dampening of expectations, but may emphasise that further tapering won’t be on a month by month basis and he’ll go into forward guidance mode. Reaction – Dollar flies initially, stocks tank. That’s around a 20% cut in QE, so a big chunk.

3.       None or too big a taper and the dollar is likely to fall. we’re likely to see falls in the buck and stocks.

I can’t stress enough that it’s going to be the language that sets the direction. We’re going to have to be very quick to trade it to get on a big move. My only caveat is for a long term position. I will still like to buy the dollar on a big fall lower rather than sell it on a big move higher. Japan has fallen slightly off the radar and the US economy is very unlikely to go backwards to any great degree. My overall trend for the buck is up and anywhere down around 95-90 and I’ll be in hoovering it up.

I also can’t stress enough that this will not be an event to trade for the inexperienced. Unless you like playing “red” or “black” with your trading account it may suit you to sit this out.  It won’t even matter if you miss a 1000 pip move, the one thing you are guaranteed is that there will always be other opportunities when trading. Resist the urge to see this as big ticket win that can change your life.