Fed Decision Question

[FelixMc]

Okay, I am confused as hell. 0.25% expected, fine.
Markets perhaps pricing 0.5% just incase, fine.

Then can someone tell me why the hell GPB & EUR fell against USD (markets pricing in the 0.5%?) yet USD/JYN fell through the floor? I'd been expecting a 0.25%, therefore market correction in the + for USD and general JYN conditions signaling weak Yen.

To me, GPB & EUR should have risen and JYN fallen!
And as for gold? Eh? Gold also fell heavily, thats a heck of a drop for a market pricing in when we all expected 0.25.

Any advice/thoughts?

P.S. I'm not hacked off just confused...money lost is lesson learned!

[muddbuddha]

I think a good question would be, why did you think that the GBP and EUR should rise in response to a Fed cut?

The common perception that high interest rates are good for the dollar have no foundation in fact whatsoever. While the dollar did gain ground against the overseas currencies while the Fed was raising, overall the dollar has continually lost ground against those currencies for several years. The dollar strength from two years ago may have been nothing more than a pullback in the major cycle.
Unfortunately we traders always feel inclined to blame and credit something or someone for currency movement when in reality, the currency markets are controlled by much stronger powers than simply interest rates.

I had a hard time understanding this too when I first started trading. I could never firgure out if the statement was good, bad, hawkish, bearish, blah, yak....and then ponder why the market moved the way it did.

Trade what you see....not what you've been told.

and that crap about, "It's already been priced in"....bullcrap. How can the people who are quick to throw out that statement know what has been priced in and by whom?

The market moves based on global fundamentals and technicals based on those that control the greater portion. If we knew what they were thinking, there wouldn't be much transparency in the market.

I was SHORT te EUR/JPY and EUR/USD based purley on technicals. I didn't bail on my positions because of the Fed statement. The EUR/JPY has already hit my limit and the EUR/USD is getting darn close.

I apologize that I couldn't give you a better answer, but in my experience, you'd do better to forget what you've been told about the common conceptions and dogma and all the "expert" analysis when in reality they word the analysis so they are basically fence sitting at the end of the article.

Dang, now I'm just rambling....

[muddbuddha]

Oh....also....if you look at the movement and volatility of those pairs in the recent days, it hasn't been very impressive on the topside. We may have crested and may be heading into another shorting cycle.

The market gets choppy and unpredictable when the cycles reverse direction. Ask anybody who's traded through a couple of them, they'll tell ya.

[FelixMc]

Let me deal with q2 first. 'Priced in'. I believed the market consensus was a .25% cut - preceeding a news release some traders leave and others join. The ones who join, side with the market consensus - in this case shorting USD against the GBP and EUR. Many price in the possibilty of a 0.5% futher shorting.

Upon the release GPB & EUR fell against USD. I just dont get why a cut on USD made these currencies weaker.

I use both fundamental and technical anlysis, however it's my guess (and I am new) that fundamentals are more important with news releases.

Thoughts?

[muddbuddha]

Originally Posted by FelixMc

Let me deal with q2 first. 'Priced in'. I believed the market consensus was a .25% cut - preceeding a news release some traders leave and others join. The ones who join, side with the market consensus - in this case shorting USD against the GBP and EUR. Many price in the possibilty of a 0.5% futher shorting.

Upon the release GPB & EUR fell against USD. I just dont get why a cut on USD made these currencies weaker.

I use both fundamental and technical anlysis, however it's my guess (and I am new) that fundamentals are more important with news releases.

Thoughts?

The .50 cut possibility was a pipe dream from the onset. There was no economic justification for a half point cut and the Fed weighs the outcome of their decisions as much as the cut itself. So while your first paragraph is 100% accurate, anyone betting on .50 and a dollar dive shouldn't be trading.

Now, why they fell. It may have absolutely nothing to do with the Fed interest rate decision. It's just time. They merely will use it as a starting point. A lot of rallys have begun on negative news. I may be wrong and there may be more dollar weakness ahead. But typically when the markets react inverse to the news, that is a signal of changing sentiment. As well, the Dow dropped over 200 points on the cut. Why? because they too wanted a .50 cut and only got .25. Anytime the Dow drops, the dollar TYPICALLY gains. Now, was that the cause? Could be. Maybe not. Maybe we're changing course and we'll enjoy, or suffer through, and period of dollar strength.

basically, you're going to see a lot of movement that makes no sense whatsoever in the currency markets in your career. If I could answer why they dropped with even 80% accuracy, I'd be rich by tomorrow.
Also, the cut was not on the USD, but on borrowing the USD. Japan has proven that a weak currency can benefit an economy just as well as a strong currency.

The profit is not in the why, but the when.

Yes, fundamentals are slightly more important than techs at news time, however, techs will weigh heavily on how the market reacts when the news is released.

[rhodytrader]

The declines in the EUR and GBP against the USD while USD/JPY was falling is very simply explained. It was carry trade related action. That's why EUR/CHF also fell as the CHF is second to the JPY as a carry trade short currency. When the US stock market freaked out over the lack of a 50bp in Discount Rate cut (and that's what triggered it, not anything to do with the Fed Funds action), the carry trade got hit too. That's been the pattern since summer.

Muddbuddha has things partly right and partly wrong. Technicals can definitely tell you which way the wind is blowing regardless of what the fundamentals might be saying, which is why I personally trade them without worrying much about all the stuff that's supposed to go into valuing currencies.

That said, the idea that interest rates have nothing to do with forex rates is totally wrong. Capital flows to where it can achieve the best return. If two currencies have everything else relatively the same, but one has higher rates, money will go there, driving the exchange rate higher in its favor. But it's relative rates and relative rate movements, not absolute ones.

Likewise, things not being priced in is also wrong. Market participants (big and small) trade to their expectations. If they expect a certain rate cut to happen, that will get reflected in their positions and action. Price will follow along. That's why markets will move aggressively when there's a surprise (traders adjusting their future expections) and why they will hardly move when there is no surprise.

That all said, longer-term timeframe traders don't really need to worry themselves too much about that kind of stuff. The news traders and short-term folks tend to blow things out of proportion, as they did yesterday.

[FelixMc]

Many thanks rhodytrader. I belive there is wisdom in what you say so I will definitely take note and research.