Market Volatility 3

Written by Research | 11 August 2010

Forex Market Behavior

The relief rally for the USD came about even before the FOMC announcement was released. Although, most analyst have already discounted the possibility that the Fed would still hold rates at their current low levels just to keep check with a slow economic recovery.

This has prompted major participants to take advantage of a corrective move for the USD before the news specially in North American early trading sessions. The most active relative to the rally of the USD is the USDCHF which touched the 1.0616 high and a whipsaw occurred after the news came by moving lower to where it is currently at 1.0569 from 1.0460 low. the effects was felt with the USDCAD that recovered from a 1.0106 parity level and since then moved higher to its current price of 1.0360 as of this writing. And the rest of the majors and cross rates are much lower accross the board.

An identifiable selling divergence on a technically sound GBPUSD chart as shown from the previous days before yesterday's corrective move back down to 1.5709 could be seen with a keen eye. This has been the result of major players active play before the news came out. And a spillover obviously occurred thereafter. the EURGBP has not or slightly been affected in spite of the Euro and the Pound heading lower currently at the price of 1.3050 and 1.5788 respectively. The 0.8180-0.8250 range would be a good support price to consider watching. Although, our bias position in still taking long trades would hold as we are more in a mid-term trade plan which our tolerance levels are well defined.

A combination of cross rates on the spot market with currency options to hold for a couple of weeks forward and a cross trade arbitrary hedge position long on the USDCHF would be a better combination. This strategy is vital to keep in place as the market reaction and behavior is unstable with increased volatility and volume trading from major players would still be in effect towards the CPI numbers this Friday closing.

However, we do not recommend the above strategies for retail investors, as market whipsaw prices like we have seen with ranges of 200 pips on both directions would easily trigger stop loss points. Stop loss or cut loss orders as a matter of trading principles are practised by almost all traders. However, for more diversified strategist in the interbank market applies a variety of position trades that simply serves as cushions in a very volatile market to weather the storm before and after any major news reports scheduled. Applying these strategies would cost more but taking into account leverage spread trading could work for those who can apply it in the retail trading . There are some limitations as some of the retail traders and investors should have known by now. Only with the appropriate amount of trading funds could be at risk in any given situation. As there are no guarantees trading a volatile market like the Forex market..

In London it is what we call the " London fake out " and in Asia we call it " Shaking out the Rookies " . This has been the case scenario in most major market price actions before and after the news released in the market place. Please stay clear out of these markets if and whenever investor and traders would not be able to tolerate such radical movement such as what happened in the last 24 hours of trade. And its just the middle of the week. Likewise, we still remain as our previous market analysis until any other developments occur this Friday.

Best of luck in your trades!