Your Trading Plan for the Fed Meeting
The Federal Open Market Committee is beginning a two-day meeting, and these strategists have a trading plan.
Central bank watchers have plenty to do these days.
The FOMC is beginning a two-day meeting, and investors think Operation Twist could be extended, giving a lift to risk assets.
At Barclays Capital, strategists Guillermo Felices and Sreekala Kochugovindan say the firm's economists think a 50-basis-point rate cut is possible from the ECB, as are asset purchases on the order of 50 billion pounds by the Bank of England. And those prospects, combined with the pro-bailout parties' victory in the Greek election, are pointing them to a trading recommendation.
"Taken together, the news on Greece and the increased likelihood of support from central banks mean that global risk appetite should remain supported in the near term, even if European specific risks remain high or even escalate," they wrote in a note to clients. So they suggest selling the euro against G10 currencies of countries with stronger growth possibilities.
In particular, the strategists suggest selling the euro against either the Canadian dollar or the Mexican peso. A dovish statement from the Federal Reserve would likely weaken the dollar - and those neighboring currencies do tend to follow the dollar's lead - "but we would expect both the CAD and MXN to perform well versus the EUR given their high-beta properties," the strategists say.
One note: while the BarCap strategists think both trades will perform well over the medium term, they argue that selling the euro against the Canadian dollar will better "reduce the binary risks related to the FOMC meeting." The loonie's moves have been closely correlated with the euro-dollar pair, they say, but buying the Canadian dollar lets investors sidestep direct exposure to the U.S. if the Fed's statement is dovish. They also say there is less potential downside in that pair than in the euro-peso pair if the Fed is unexpectedly hawkish.
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