As previously highlighted in my previous blog post, (s&p-500-low-volatility-is-not-here-to-stay) I was growing increasingly worried over the seemingly "naive" consolidation sideways pattern and highlighted that volatility (VIX front end futures) was getting cheap, positioned for a great long.
S&P 500 - Testing pivot support
Indeed, the past few days have now seen the market starting to price VIX fairly with a 40% spike higher ( Sounds like free $ to me if you had followed my trade idea) off the back of lower oil, high yield credit markets coming under pressure and lastly more focus on the December Fed meeting.
What to expect next?
FED - All eyes on the meeting tomorrow and this would clearly set the tone for trading in all relevant markets. Yellen has been reiterating on the need for more transparency, as well as hinting at the possibility of a 2015 rate hike. Although this has been postponed due to a string of bad data, Chinese devaluation causing a market rout etc. Now that this is all out of the way, I personally am leaning towards the consensus call, for a hike in rates but with a dovish statement.
I.e. Would expect something along the lines of:
" 25bps points increase in fed funds ...but will continue to monitor inflation/employment numbers very closely, looking towards a gradual hiking cycle..."
Whilst this is still pretty unclear how the markets might react to this, i think risk is skewed towards volatility subsiding and I will square my longs on VIX and take profit at these levels.
FX: (NZDUSD)
A trading opportunity on the FX front would be on the theme of USD selloff post fed hike. I believe USD long positions are currently stretched at the moment and we are poised for a "buy the rumor, sell the fact" move into this FED meeting. As such, USD seems like a good sell at the moment, with my favorite expression in NZDUSD. Technically it has already cleared above various key resistance levels and it remains the highest yielding carry currency in G10.
Trade: Long NZDUSD, take profit into the end of USD correction. (end of 2015)
Close/stop trade if fed hikes coupled with a hawkish statement .
Posted by PositiveAlpha.
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