Happy Friday, Friends. The Fed’s tapering process has commenced. As would be expected from the FOMC, particularly given its current composition, the step was a modest one, with the only surprise the equal reduction (by $5 billion each, monthly) of purchases in both Treasuries and mortgage-backed securities. The implication is that the Fed believes that the housing market is on relatively solid ground. That in turn depends in large part on interest rates, and it will be worth keeping an eye on the 10-year T-note yield, $TNX. This is currently at 29.46, reflecting a yield of 2.946%. A move over 30 will begin to be interesting, and a potential negative for equities generally.
What does all this mean for the Dollar? Probably not a great deal, at least initially. One of the props supporting the Dollar has been large inflows from creditor nations and sovereign wealth funds looking to place their excess Dollar reserves in Treasuries. Tapering shouldn’t alter that much. Short term interest rates in the U.S. will remain close to zero, but that is a perpetuation of the status quo. The European Central Bank still has a small amount of room to ease further, and the Japanese authorities are, at present, doing what they can to weaken the Yen.
That has made USD/JPY pretty close to a one-way bet, which traders love. The charts of USD/JPY are largely in synch across time periods. It’s pretty tough to buy for those not already involved, but dips will probably be bought aggressively unless and until the government or the Bank of Japan begin to signal discomfort. That doesn’t seem likely to happen soon. The declining Yen will, other things being equal, aid Japanese exports, and hurt its regional competitors, including Korea and Taiwan.
EUR/USD is more ambiguous. While we’re no longer deluged with daily stories predicting the imminent demise of the single currency or the European Union, plenty of tension remains. The daily chart shows a pullback to 1.3102 that was buyable, but it has since failed to produce higher highs. At the same time, it has been in a renewed uptrend since bottoming at 1.3294 on November 6. “Up” still appears to deserve the benefit of the doubt, but more cautiously, perhaps using a shorter (hourly) timeframe until there is more clarity. The downtrend on that chart is quite clear, with the area around 1.37 looking likely to pose some near-term resistance.
Just some pre-weekend thoughts for your consideration. As Todd Mitchell frequently reminds us, it is essential to identify the level at which you will know you’re wrong prior to entering a trade. Making sure that your initial stop loss is in place and adjusting your position size appropriately will help to keep you in the game. Trading involves losses. The key to survival is making them manageable, so that the wins will move your equity curve up and to the right, much like USD/JPY.
Best of luck today, and best wishes for a great weekend, Friends.