Money in Motion

Busch: MIM Trade For FOMC

United States Federal Reserve
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Due to breaking news on last Friday's Money In Motion, we dropped my trade structure for today's FOMC meeting.  Here's the info.

The FOMC meets amid turmoil from the European debt crisis and rapidly slowing US economic activity.  Expectations are high for action by the central bank due to the calendar change - the meeting, which normally takes place in one day, is stretching to two. The market is pricing in a "Twist" operation whereby the Fed sells short dated maturities and then uses those proceeds to buy longer dated securities, from 7-year notes to 30-year bonds.  This is likely fully priced into the market, with $300 billion the target amount.

What's not priced in would be the FOMC selling more than $500 billion in short dated securities to buy long dated (more aggressive) to force yield curve flattening, or using shorter dated securities to buy corporate credit to add to the portfolio.

So here is the binary event trade:

If the FOMC votes to do the expected:

Buy GBP/Sell EUR

Entry 0.8750 (or whatever current spot level is)

  • S/L 0.8810
  • T/P 0.8570
  • 3:1 return

If the FOMC votes to do the unexpected:

Sell USD/Buy TRY

Entry 1.7800 (or whatever current spot level is)

  • S/L 1.8010
  • T/P 1.7290
  • 5:2 payout

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.

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