Daily Alert – Friday 18th June 2021: The Fed get the party started

Mark NugentDaily Alert, June 2021

Daily Alert – Friday 18th June 2021: The Fed get the party started

On Wednesday I wrote that I was hoping for a market over-reaction to any surprises contained within the Fed’s famed dot-plot due at 7pm BST that day. Other than the ongoing surprise that the dot plot no longer contains any dots (as the dots spread confusion and panic amongst social scientists), the real surprise was that the Fed voters showed a significant move to “earlier” and “more” interest rate hikes than previously intimated.

The crowd went wild. The USD jumped up. In fact, it started to rise significantly at 630pm BST, thirty minutes before the announcement. I am tempted to rant but will resist. The move continues to this moment (1pm BST) with our own in-house USD index moving from 91.4 to 92.9, or 1.6 percent. That is a lot for a currency.

GOLD had a fit as well but had the decency to wait until the announcement at 7pm. At Thursday’s close it was 4.6 percent down. Today has seen the beginnings of the inevitable reversal.

Equities dropped as corporates do not like higher interest rates, but the move was not severe, and performance was mixed yesterday. They are dropping like a stone right now, probably due to today’s so-called “quadruple witching”. I am kind-of embarrassed to be involved with anything that involves “quadruple witching”. It is in fact the expiration of equity index and individual stock futures and options all on the same day. It happens four times per annum and its correlation with volatility and profitability is zero. But hey, people need their “woo woo”.

On currencies, EUR, GBP, CAD, AUD and NZD drop like a stone (since the Fed on Wednesday) due to the high relative weighting of the USD in each index calculation. In contrast, the JPY soars, its wings lifted by good old fashioned solid risk-off sentiment.

WTI (oil) has taken a hit on the strong USD, and it looks like the weekly trading experiment will return a small loss. However, with cyclones expected in the Gulf of Mexico, possible disruption to the return of Iran to the oil scene due to today’s elections and their aftermath, and Goldman Sachs saying oil long is the “highest conviction trade”, this week’s drop simply gives us better pricing for a near-term rise.

So, how about the trading then? As I said on Wednesday, it would be nice to see an over-reaction to allow us to trade the reversal. I was triggered into a GOLD long at 4am this morning as price began to recover. I will hold it over the weekend as there may well be a gap up on the Sunday night open. I will trade the USD short when it stops rising. The Fed-inspired drop in equities was not enough to trade the reversal, but today’s down moves look good, particularly on the Japan225.

I almost forgot, Monday’s bite at Japan225 was taken out at breakeven on Wednesday.

Trade of the week was EURUSD short, entering at 7pm on Wednesday as the Fed made their announcement. Or preferably at 630pm when your mate with the embargoed press release sent you a WhatsApp with the low-down. It is currently over 3x ATR down, which is roughly 6x risk. But that is not the way I trade as getting into news flow-driven trades can be very tricky for retail traders like us, so I will wait and get my reward on the other side when it reverses.

Have a great weekend. Next week should be fun.

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