Ben Bernanke and his colleagues at the FOMC are making their first rate decision after the unexpected drop in the American unemployment rate. Here are two dollar-bullish moves they could do. Since the dollar yen correlation is strong, shorting the yen crosses looks quite interesting. Here’s a preview for the FOMC Statement:
Past Dollar Yen Correlations
Strong moves in the dollar usually mean that the dollar strengthens against all the currencies, or weakens against all of them. But again and again, the correlation between the US Dollar and the Japanese Yen appears.
This correlation means that when the dollar strengthens against most currencies, it loses ground to the Yen. And when the dollar weakens against most of the currencies, it strengthens against the Yen. For example, if EUR/USD go up, so does USD/JPY. And when GBP/USD goes down, so does USD/JPY.
In February I wrote about this issue for the first time, and then I recommended that when the Dollar Yen correlation appears, trading the Yen crosses is favorable.
This phenomenon appears from time to time, and it usually goes hand in hand with big moves. At the beginning of March, the Non-Farm Payrolls for February sent the dollar plunging against the European currencies, but it made gains against the Yen. Here’s as analysis of the currency correlation on that NFP release.
After a few months that were mostly characterized by trading in narrow ranges, the forex market went wild last week: the dollar collapsed and then leaped back up.
At the beginning of this week, the dollar gained against the European currencies, but yet again, weakened against the Yen. The moves at the beginning of this week are still not big. The market is expecting the FOMC Statement.
Why this FOMC Statement is Different
Ben Bernanke already shook the markets on March 18th, when the FOMC Statement was a real bomb – printing 1 trillion dollars. After a few months of calm statements and calm reactions, this FOMC Statement comes in the aftermath of the surprising fall of the unemployment rate in the US
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The Federal Open Markets Committee stands at what seems like a crucial moment. Are Ben Bernanke and his friends also optimistic about the recovery? Obama was quick to celebrate. While the Federal Funds Rate isn’t expected to move from a maximum rate of 0.25%, the FOMC Statement sure is interesting.
If they see the light at the end of the tunnel, they could do one of the following:
- Hint about a future rate hike: After months of rock bottom interest rates, Bernanke could start preparing the markets for a change in policy. January 2010 sounds reasonable, but he could also hint that the rate will rise sooner.
- Stop the toxic assets plan: after printing a significant amount of the money that was allocated for buying the banks’ toxic assets, he could state that the program reached it’s goal, and the banks have stabilized.
In any of these cases, the dollar will rise. And if the dollar yen correlation doesn’t fail, the Yen will rise even more. So, a short on the EUR/JPY or on the GBP/JPY could be a good opportunity.
If Bernanke and co. don’t see the recovery like Obama, the dollar will likely drop, and long positions on EUR/JPY and GBP/JPY would be interesting.
Since commercial traders are dollar bulls this week, then in the first scenario, of dollar gains, the move will be bigger than in a case that the dollar falls.
This is my sentiment, and I may always be wrong…