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Blogs about basic information in forex trading, forex participants and how to earn big in forex trading.Just when you thought the markets were starting to calm down and that the news out of the Euro zone was beginning to fade, the US Fed dropped a bombshell on world markets last night at 4:30 PM EST, just after the US stock market closed.  The Fed announced to everyone’s surprise


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Just when you thought the markets were starting to calm down and that the news out of the Euro zone was beginning to fade, the US Fed dropped a bombshell on world markets last night at 4:30 PM EST, just after the US stock market closed.  The Fed announced to everyone’s surprise that they would be raising the rate at the Fed discount window 25bp to .75%, effectively charging banks more for Fed borrowing.

The markets immediate reaction was to buy dollars and cover dollar shorts, and stock futures tanked.  Asian equity markets were down big last night and Europe looks to be bouncing back from earlier lows.

This move was the dominant theme in the overnight market, as retail sales figures in the UK and Canada are taking a back seat, as is the US CPI report which came in less than expected showing that inflation may still be at bay.

The two major things to take away from this move are: 1) the Fed is stressing that this move is not to tighten credit on consumers and businesses, but is merely trying to remove some over the overly-accommodative measures they have taken, and 2) investors need to be wary of the fact that the Fed may continue with these “sneaky” off-hours moves to try to avoid inter-day market Armageddon.  It will be interesting to see how the market reacts to this move once trading begins today.

In currencies:

Aussie (AUD):  The Aussie is down this morning as it is the currency that is most likely to be affected by this move, all other factors being equal.  While I wouldn’t classify today as a risk-taking or aversion day, this is the third day in a row that the Aussie is down against USD.

Kiwi (NZD):  Like the Aussie, the Kiwi is down 3 in a row.  In addition to being affected by the discount rate hike, New Zealand has just reported the widest budget cash deficit in almost 9 years on lower tax receipts and increased government spending.

Loonie (CAD):  The Loonie is lower this morning on lower commodity prices and the US discount rate hike.  Also, Canadian retail sales figures came in slightly less than expected, but were at least positive.  This could be a sign that economic growth is not as strong as investors may think, and everyone is anticipating the inevitable “Olympic Hangover” as the one-time economic windfall goes away.

Euro (EUR):  The Euro is at nine-month low to the Dollar after the discount rate hike in addition to all of the problems coming from the Euro zone.  Now speculation is heating up that perhaps Italy used the same sort of derivative maneuver to conceal debt that allowed them to enter the EU as well as Greece.  There’s a lot of tension and in-fighting right now among EU members.  This could put further pressure on the Euro in weeks to come.

Pound (GBP):  The Pound is also at a nine-month low to the Dollar as fiscal concerns continue that the UK may need to continue accommodative measure to revive their economy.  Retail sales figures came in at a disappointing -1.2% vs. and expectation of -.5%, showing further economic weakness.

Dollar (USD):   It is going to be interesting to see how the market reacts to the discount rate hike today.  Personally, I think that this move shows that the Fed is trying to get the market to believe that economic recovery is taking place.  This move is sort of a red herring, which induced a knee-jerk reaction from the market as soon as everyone hears “rate hike”.  This move does not affect the Fed Funds Rate so it shouldn’t affect either businesses or consumers.  So by the end of the day I expect that we’ll see some risk-taking as economic strength in the US is good for world economies and inflation is lower as reported by the CPI.

Yen (JPY):  The yen is higher on risk-aversion, however I think the market may “have it wrong” as its gotten used to the risk-on, risk-off mentality.  Let’s see if the Yen gives back some gains by day’s end.

In overnight markets, the Hang Seng and Nikkei were down over 2% and European markets have reversed prior losses and are trading higher.  US futures are still negative, but trading well off their lows in the overnight session.  Oil has reversed earlier losses and is trading around 79.5, and gold is back to around 1115.

When I saw the charts last night immediately following the Fed move, my initial reaction was similar to that of much of the market—sell everything, buy dollars and yen.  However, as I thought about the implications of the move, I’m actually quite impressed with the timing of the move and think the Fed did a great job implementing this.  And I haven’t been a big fan of the Fed as of late!  In my view, this is positive for world markets.

Also, watch out for volatility as today is options expiration.

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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