FX - Trading the News in 2012

Know What to Look For

Before developing a ‘trading the news’ strategy, market participants should become familiar with the event risks that heavily impact the currency market. During normal market conditions, shifts in government policy paired with economic developments tend to drive price action, and being able to identify the key event risks can help avoid being on the wrong side of the market.

During the FXCM expo in Las Vegas, I had an opportunity to go over the top five fundamental themes that drives the foreign exchange market along with the implications of these economic developments.

Top Five Market Moving Events - FXCM Expo 2011

Have a Trading Plan

There are a few strategies that come to mind when trading news events. However, finding the style that fits one’s trading personality and tailoring it to meet different needs can help to curb the risk for loss while broadening the scope to profit from market volatility. Some strategies involve setting up entry orders ahead of the event risk, while others are dependent on mathematical calculations, but all require some degree of prudence and flexibility given the inconsistency in market reaction. At times, the best move can be to stand aside when traders show a muted reaction to the news or when the market turns choppy.

In this presentation, I go over the ‘trading the news’ strategy that fits my trading personality along with the thought process behind some of my trades.

Trading the News - FXCM Expo 2011

Trading the News in 2012

Trading major U.S. event risks has been a difficult task in 2011 give the strong correlation between the U.S. dollar and risk, but these dynamics may break down in the following year as the fundamental outlook for the world’s largest economy improves. Indeed, the Fed’s zero interest rate policy (ZIRP) has been the main culprit behind the risk-driven market, but we expect to see fundamentals playing an increased role next year as the central bank softens its dovish tone for monetary policy. As the more robust recovery limits the Fed’s scope for another large-scale asset purchase program, we should see the FOMC carry out ‘Operation Twist’ in 2012, and the central bank may conclude its easing cycle in the following year as economic activity gradually gathers pace. As the risk of seeing QE3 subsides, fundamental developments should have a greater impact on the dollar exchange rate, and the market reaction should be more straight forward in the following year as the Fed talks down speculation for additional monetary support.

As the economic docket for the following week is expected to show U.S. Non-Farm Payrolls increasing another 150K in December, the ongoing improvement in the labor market should prop up the greenback, but the FOMC minutes due out on Tuesday could shake up the currency market as investors weigh the prospects for monetary policy. In light of the developments, we should see the Fed raise its fundamental assessment for the region, and the central bank may endorse a wait-and-see approach throughout the first-half of 2012 as the sovereign debt crisis dampens the outlook for the world economy. In turn, Chairman Bernanke may preserve a cautious outlook for the region, but we may see the central bank head curb expectations for more quantitative easing as the economy skirts a double-dip recession.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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