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January 29th, 2013 at 5:15 pm

Spotlight on FED and RBNZ.

Currencies have been displaying low volatility so far this week, at least when compared to the most recent history. This could change on Wednesday, following policy meetings of two central banks. By far, the biggest event of the day is the interest rate announcement from the Federal Reserve. While nobody expects the actual rate to change, analysts will focus on the language of the statement. Most analysts do not predict major changes to the current policy, which is an open-ended QE in form of bound buyback program. The cornerstone of this policy is the unemployment rate below 6.5% and/or inflation above 2.5%. Realistically, major new developments are unlikely, but currencies always become jumpy immediately following the release and tomorrow should be no different.

Incidentally, announcement from the RBNZ could be more interesting. Even though the consensus calls for no change to the current rate of 2.5%, chances for a surprise action are higher than from any other main central bank. Admittedly, its impact will not be broad, but localized to the New Zealand Dollar. However, it is not uncommon for the Kiwi move 50-70 pips within minutes after this event, often establishing new intermediate term trend in the process. It certainly is worth watching by those trading the NZD.

Yesterday I discussed a simple straddle trade on the hourly chart of the EUR-CAD. With focus on a narrow consolidation zone, I placed two orders on either side. The sell order was filled at 1.2524. Unfortunately, there was no significant acceleration in the price movement. It dropped but at a much slower pace than expected. I settled for a small gain of 19 pips, cancelling the buy order at the same time.

Over a week ago, I covered a short trade in the NZD-USD, using the 4H chart for the set up. After stalling for several days, the price made a sharp down, easily falling through my sell order at 0.8322. Very quickly, the trade was about 50 positive, or about half of my objective. That, however, was the extent of the selloff – sudden rebound developed next. I decided to take a small loss, a disappointing outcome.

Among other things, I am looking at the AUD-CAD. This commodity currency cross has been drifting sideways for some time, finding support at 1.0460. If this level is breached, I want to sell it at 1.0458. The objective here is 40-45 pips, in line with the time frame (1H) and recent volatility. As for the announcements from central banks, covered earlier in this post, I will watch for developments following the releases. If trends start to form, I might enter into short-term trades in their direction.

Mike K.

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