The much anticipated FED decision became a history, with not much in terms of surprises. Largely as expected, the benchmark short term interest rates were left unchanged, at 0.25%. Also, just like mentioned yesterday, the FED announced a new round of quantitative easing. On the surface this move seems to be a modest one,  using the proceeds from the earnings on mortgage bonds to buy longer term Treasuries. It is estimated that roughly $10 billion a month would be available to buy the government debt. The Fed said it expects to start buying the government debt on August 17. The net effect is to keep its $2.3 trillion balance sheet steady, while shifting its holdings into more government debt.

The aim is to reduce the amount of government debt securities in the market, which would keep the longer term interest low. Obviously the central bank is  hoping (and praying), that availability of cheap money will stimulate the economy, boosting the job creation process. Unfortunately, the Treasury Department has to borrow about $1.4 trillion in just new debt over next fiscal year, to not to mention the refinancing of maturing obligations, so the supply of notes and bonds will remain just about inexhaustible. In general, the steps announced by the FED are expected to have a minimal, if any, real impact on the economy.

Of more importance than any action taken by the central bank might be the admission that the recovery is not progressing, putting in doubt the global outlook. With the US economy sputtering, the commodity dollars might feel the pinch. While many recently have linked the prosperity of the “other dollars” to that of China, one has to remember that the Chinese expansion is also slowing down. Most of the data from there comes short of expectations as well. Charts are starting to look bearish for AUD, NZD and CAD, with the Kiwi being a leader and the others in tow.

The situation is most visible against the Yen, but these currencies are also tanking in relation to the USD. For example, the NZD-JPY already broke through a major support on the intermediate term chart. Now chances are that the AUD-JPY will follow. Current support on a 4H graph is at 77.25. If it breaks, a 150 pips move is a real possibility. In a perfect world it would be nice to see a bounce off of this support, before a stronger swing down. Still, the commodity dollars seem to be heading lower.

As is typical for me, I didn’t trade the FOMC rate decision announcement, but took a bunch of small time trades before the event. These two trades were covered in the last post and both of them worked out as expected. Seems that all JPY pairs are making waves and are worth watching. Not only because of fast moves on the way down, but any bounces on support levels are likely to be fairly strong. There should be good opportunities for quick pips on both sides of the market.

Mike K.