Though the announcement of the Federal Reserve on Thursday to keep interest rates near zero wasn’t surprising for many analysts, the markets didn’t seem to know how to respond. Though Wall Street rallied about 1 percent in advance of the Federal Open Market Committee (FOMC) announcement in a trend that has been identified as the “Pre-FOMC Announcement Drift”, they lagged slightly following the announcement, though the drop was not nearly as dramatic as doomsday-predictors expected.
Friday’s Asian session saw wide swings in performance, with the Nikkei index of the Tokyo Stock Exchange losing more than 1 percent while China’s Shanghai Composite inched up about 0.4 percent, largely thanks to data released by the National Bureau of Statistics that confirmed a rise in new home prices in August, the fourth month in a row.
What does it mean for the USD?
With so much volatility in the global markets, it’s absolutely critical to pay attention to exchange rates, especially for the US dollar, if only because a strong greenback can cause drama and trauma for US-based companies, which in turn can mean that fewer dollars are being pumped into the global economy. Though the dollar may not be fluctuating wildly at the moment, the undercurrent of a tornado may be gathering, and traders who don’t watch this currency carefully may find their money getting swept away. Anyone trading exotic pairs or investing in emerging markets should be concerned about the strong dollar and what this will mean for trading. Sitting on the sidelines for exotic pairs for a while may not be the worst idea.
It is also important to realize that just because the Fed didn’t raise rates now doesn’t mean the hike will be postponed until next year – there are many speculators betting on the fact that 2015 may be the year to buck the trend and raise rates.
Ironically, Fed Chair Janet Yellen cited “heightened uncertainties abroad and the slightly softer expected path for inflation” as the motivating factor for the Fed’s decision, but traders could argue that the decision has only served to heighten uncertainty further, especially for traders with a global trading strategy.