Investors Lightened Positions Ahead Of FOMC On Tapering Uncertainties

Price actions in the financial markets indicated that investors were lightening up their positions ahead of the FOMC meeting this week, as well as year end holiday in around two week's time. The House passed a bipartisan budget plan which should reduce the near term fiscal drag. And together with recent solid economic data release US, markets have perceived there is increased chance for Fed to taper the USD 85b per month asset purchase program in the last 2013 FOMC meeting. But it should be noted that there is no consensus view on the issue among analysts. And, we doubt if there is consensus among Fed officials too at this point. There are arguments for Fed to taper this month and there are equally strong arguments for Fed to wait till March to act. The result of the coming FOMC meeting is highly uncertain.

And with such uncertainties, Dow extended recent correction to close at 15755.36 last week despite a brief rebound attempt, and lost 16000 handle again. The S&P 500 also closed the week down at 1775.32 after failing to stay above 1800 handle. Both 10 year and 30 year yields recovered during the week but were bounded in familiar range. The dollar index breached 80 psychological level briefly before recovering to close at 80.21. There is no sign of reversal in stocks, bonds, nor dollar index. The price actions are viewed as consolidation/correction only.

In the currency markets, the greenback was rather mixed. The recoveries against euro and swiss franc were rather unconvincing and corrective looking. The dollar did took out a near term resistance against sterling, but that was more due to cross selling in the pound against the euro. The USD/JPY extended recent rally but failed to extend gains above 103.73 resistance. Though, the AUD/USD was clearly weak, thanks to broad based selling in the Aussie, as the worst performing currency. The Canadian dollar was the strongest currency last week.

Technically, we're expect some consolidative trading in the early part of this week before FOMC. The question is on positioning to act after FOMC announcement, which could be followed by some knee jerk reactions. There are a few points to note. Firstly, there is no change in bullish trend in the EUR/USD and bearish trend in the USD/CHF yet. The GBP/USD's might correct lower, but downside should be relatively limited unless there is broad based rally in dollar. The AUD/USD is close to 0.8847 key support level and might draw some support there for rebound, and thus we'd prefer not to sell it even though it's clearly the weakest currency. The bigger potential could be find in yen crosses which is starting to show sign of reversal. In particular, if stocks respond negatively to FOMC announcements, we might see stronger rebound in yen.

Our strategy of the GBP/USD was not totally wrong last week as it did broke 1.6442 resistance. But the late selloff could have left some of our readers in losses. This week we'll turn to two cautious strategies. Firstly, we'd prefer by the EUR/USD on break of 1.3820 resistance in case dollar resumes selloff after FOMC. Secondly, we'd sell the EUR/JPY on break of 140.91 support for a correction back to below 140, provided that the EUR/USD is limited below 1.3820 resistance.