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Busch: Money In Motion Trades for FOMC

United States Federal Reserve
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United States Federal Reserve

On last Friday's show, I provided a trading idea for the Federal Reserve's monetary policy meeting. Here it is again, with an update.

January 26th FOMC announcement.

From the lows on January 12th of 0.9805, the Aud rallied to 0.9970 on January 25th. The 2yr interest rate spread between Australia and US went from a low on January 11th of 428 bps to 441 on January 25th. On January 26th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Aud continued its rally after the announcement, but only closed up .15 at 0.9995 and the 2yr spread moved down 8 to 431 bps. The Aud up move kept going until Feb 4th when the Aud hit 1.0250 and the 2yr spread hit 443.

March 15th FOMC announcement. From the February 14th low of 0.9865, the Aud rallied to 1.0170 on March 14th. The 2yr interest rate spread between Australia and US went down from 428 bps on 2/14 to 423 on March 14th. On March 15th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Aud fell to 0.9825 and the 2yr spread fell to 412 bps. However, the down move stopped on March 17th at .9710 and moved up to 1.0790 on April 26th and the 2yr spread hit 433.

April 27th FOMC announcement.On April 27th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Aud was rallied and closed at 1.0880 while the 2yr spread remained at 433. The up move kept going until May 2nd when the Aud hit 1.1000 and the 2yr spread hit a new high for the year at 451 on May 5th.

All 3 three meetings have led to unchanged US interest rate policy.

Two out of three meetings led to a higher 2yr Australia-US interest rate differential in favor of Australia.

Two out of three meetings led to a higher Australian dollar against the US dollar.

If the FOMC leaves rates policy unchanged, here's the trade.

Trade for day of FOMC:

Buy Aud/Sell USD

  • Entry: Using current spot levels 1.0600 (whatever is prevailing Wednesday before the meeting)
  • S/L 1.0500
  • T/P 1.0900
  • 3:1 Return

It works even better for the Euro:

January 26th FOMC announcement. From the lows on January 10th of 1.2870, the Euro rallied to 1.3675 on January 25th. The 2yr interest rate spread between Germany and US went from a low on January 5th of 20.5 bp to 68.5 on January 25th. On January 26th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Euro continued its rally after the announcement and closed at 1.3715 and the 2yr spread moved to 68.8 bps. The up move kept going until Feb 2nd when the Euro hit 1.3850 and the 2yr spread hit 82.75.

March 15th FOMC announcement. From the February 14th low of 1.3430, the Euro rallied to 1.4000 on March 14th. The 2yr interest rate spread between Germany and US went from a low on 2/14 of 55.3 bps to 103.65 on March 14th. On March 15th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Euro was unchanged and closed at 1.4015 while the 2yr spread fell to 99.0 bps. However, the up move kept going until April 21st when the Euro hit 1.4650 and the 2yr spread hit 109.8.

April 27th FOMC announcement. From the April 18th low of 1.4160, the Euro rallied to 1.4650 on April 26th. The 2yr interest rate spread between Germany and US went from a low on 4/18 of 107.25 bps to 112.25 on April 26th. On April 27th, the FOMC met and left interest rates unchanged at 0.25% as expected. On that day, the Euro was rallied and closed at 1.44790 while the 2yr spread moved up to 116.25. The up move kept going until May 4th when the Euro hit 1.4940 and the 2yr spread hit a new high for the year at 132.0.

Two out of three meetings have led to unchanged policy, a higher 2yr Germany-US interest rate differential in favor of Germany, and a rally in the Euro.

Trade for day of FOMC:

  • Entry Buy Euro/Sell Usd: Using current spot levels 1.4350 (whatever is prevailing Wednesday before the meeting)
  • S/L 1.4150
  • T/P 1.4950
  • 3:1 Return

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm. "Money in Motion Currency Trading" will repeat on Saturdays at 7pm.