No trade ideas from me today – participation will be light, and I expect range trading despite a rather busy calendar. But more on that later. Got some M&A news today, that could impact FX flows in the coming days: InBev NV wants to buy SABMiller PLC; Altice SA is in advanced talks to buy Cablevision Systems Corp.
Now onto recent developments. Nzd data overnight confirmed the RBNZ’s dovishness: GDP missed expectations, and the recent surprize in dairy prices is definitely seen as temporary. So the strategy remains to sell rallies in Nzd until something gives.
And now onto the main event: FOMC. The market is not pricing in a rate hike, and the CPI data from yesterday only strengthened this convinction. In any case, the decision will have a decisive impact on FX rates and just remember that low liquidity & higher spreads during and immediately after the release make trading conditions poor. Best to wait until the dust settles, before looking for a clean shot.
So onto the scenarios:
a) Dovish Hike: I would expect the USD to spike higher, followed by a reversal. This could also prove to be bullish for risk-assets.
b) No hike but hawkish statement: I would expect USD weakness, followed by a recovery. This will also be bullish for risk assets.
c) No hike and dovish statement: decisive decline in USD. This would be slightly negative for risk assets, implying that external developments weigh more than expected.
d) Hike and hawkish statement: decisive rise in USD and this would instead put more downwards pressure on risk assets.
In the FX market, Aud (as Sean has also been highlighting recently) remains one of the best currencies to play vs. USD weakness. At the same time, a rally in risk-assets would imply selling Jpy (& Eur possibly) vs. USD.
How is all this useful? Simply stated: now you have alternative scenarios (& tactics to deploy) depending on the outcome this evening.