antipodean currencies back in focus after fed gave feel good statement to markets but can we really

Option volatility in the local crosses had heightened over the three days leading up to this Fed meeting (29th October). Risk was to the upside as the USD bullish trade came back into focus.

Post-meeting, both the Australian dollar and the Kiwi dollar came under pressure, as the Fed concluded its QE3 buying and made forecasts for the coming year.

The statement was more hawkish than anticipated and avoided some of the markets‘ concerns over global growth and disinflation, sending the US dollar back to the upside.
But where do we go from here?

The main focus for the Fed should now shift away from employment and onto inflation. Despite their patience in removing existing policy, language suggests we could see faster progress when it comes to rate hikes.

So could these be a turning point?

Investors have been calling a lower Australian dollar for some time. With growth concerns in China, falling commodity prices, a tighter federal budget and projections for employment looking increasingly grim, traders have been calling a break to the downside. But so far the trade has been a painful one.

Second guessing recent themes, traders have been burnt when trying for a follow-through on USD strength. Despite a move ranging three big figures post-FOMC, both AUD and NZD have settled back into the Asian session range.

So what are we looking at?

So far, AUD has been stuck between 8650 and 8850. It sits somewhere in the middle of this range as I write. Retail positioning in the unit is mixed and the short positions held prior to the meeting have mostly consolidated to lock in profits.

NZD positioning, though, remains heavy. Selling continued into the Asian session as the RBNZ omitted key statements about further tightening in 2015, and NZD/USD pushed through the 7800 barrier once again. The trading range remains 7780-7950 but the downside pressure looks to be building.

What catalyst will create the break?

It’s a big start to November with the Australian market releasing big docket data in the form of employment numbers, RBA cash rate and retail sales. Expect options volatility to be pushed higher and the two-way action in the unit to continue. We also line up for the September non-farm payroll number. A good number here should reinforce comments from the Fed, and the hawks and the bulls will be out in force, buying into US dollars.

Though the temptation lies in jumping on the USD dollar strength, playing the cross rates may also yield good opportunities. Watch out for key levels in NZD/JPY and AUD/NZD as divergence in positioning becomes more apparent.