Kruger Insights Wednesday – December 18, 2013 by FirstMacro

BinaryOptionsNow | Published on December 18, 2013 at 11:02 am

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The Big Decision – As I scan the currency markets on Fed day, there are no compelling opportunities in the major currencies that are screaming out to me. Whatever the outcome today, I am positioned over the medium-term short risk assets, and have built up decent exposure short NZD/USD and short the S&P. I am in the camp that believes risk assets, particularly US equities, have been supported by Fed policy, and now that this policy is fully extended, these assets will enter a period of underperformance. With this in mind, I think the risks associated with the Fed staying on the dovish side today are far greater than the risks associated with a move towards reversal. If the Fed does nothing today (no taper, or no strong language suggesting imminent taper), I wouldn’t be so sure this will translate into a massive equity rally. Again, if the Fed has nothing left to do but stand still, we could start to see equity markets pull back on profit taking, with no fresh incentive to buy. Furthermore, failure to act ultimately sends a disturbing message to market participants, that despite all of the positive data in recent weeks that would support a move towards reversal, the Fed still is afraid to act. So in this scenario where the Fed does nothing and stays on the dovish side, what happens when equity markets fail to respond favorably and actually start to reverse sharply on profit taking. This could create a panic environment with the Fed standing by helplessly, unable to do anything to buoy the setbacks.
kruger insights december 18, 2013
Continuity And Cohesion – But if the Fed moves towards a taper, and comes out less dovish than market participants are expecting, at least in this scenario, when risk assets come under pressure, investors will be comforted by the fact that the policy decision and reversal in equity markets are because of positive developments in the economy. This is the better scenario in my view and one the Fed should embrace. I am actually quite surprised analysts are only pricing in a 33% chance of taper today in light of the above, and am concerned that the Fed will cater to analyst expectation and not want to shake things up because of this. Another pro taper argument in my view is that the initiation of the official reversal while Bernanke is still on the watch, will translate into a smoother transition for Yellen, with the move giving market participants a nice sense of continuity and cohesion at the Fed. The two key members at the Fed that were there from the start of this unprecedented monetary easing policy, will be there together to to bid this policy farewell. However, if Yellen is the one to initiate the reversal without Bernanke (the longer she takes the more dangerous), it could open the door of uncertainty, with market participants questioning and comparing the two policymakers. I don’t think this is what the Fed will want, especially considering the actual impact of a Fed taper on the economy would be less than marginal at best. Better to get the show on the road now.Slow Starter – Moving on, I recently established a fresh long position in AUD/NZD at 1.0897 that is underwater. Still, I was fully prepared for the possibility of additional weakness before the bounce and am looking to hold this position into 2014. I will only grow concerned if the market puts in a weekly close below 1.0700. Technically, the price action is unreal, with the market showing oversold across the board. Daily, weekly, and monthly studies are deeply stretched and warn of the need for a major correction. It isn’t too often that you get this type of confluence, and when you do see it, as a contrarian, it is a dream. Fundamentally, I believe there is just too much good that has been priced into New Zealand of late, and the relative outperformance in the currency is a severe liability for the local economy. If risk assets come under intensified pressure over the coming days and weeks as I believe they will, look for significant Kiwi outflows, as market participants flee from the higher yielding commodity currency. But let’s get something straight right now. While I absolutely love this trade, it does not mean that my whole life is on the line with the position. If it doesn’t work out then so be it. I will dust off and move on. But I gotta say..it is a very pretty setup.

Short Of A Lifetime – Last but not least – Bitcoin. I would never have guessed I would be recommending positions in Bitcoin at the beginning of the year, but on November 29th, as per below, I couldn’t ignore the hyperparabolic price action. Today I recommended fully exiting the trade at $580 as per analysis earlier this week that targeted at retest of the previous December base at $576. This is definitely a trade I will not forget. I am most intrigued with this virtual currency and am not sure what the future holds for the market. For now, it has caught my attention, and I will make sure to keep an eye. I still think there is a risk for deeper setbacks towards $200, but at the moment, I am sidelined.

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