Trading the Fed’s Expected QE Tapering

The Fed Reserve introduced the first of several measures to spur growth of the US economy about 3 years ago, when the US economy was reeling badly under the effects of the 2008 global financial meltdown. These measures to stabilize the financial system and the American economy, came to be known as the Quantitative Easing Program or QE.

Under this arrangement, the Federal Reserve buys bonds from commercial banks to the tune of $85bn every month, crediting such money directly to the banks’s reserve accounts. This program was expected to continue until the unemployment rate dropped to 7% or below and there was noticeable stability in the economy.

This money was provided at nearly zero interest rates, allowing the banks some breathing room to pass on the cost savings of the near-zero interest rates to businesses and individuals in terms of loans.

These cheap loans have also seen investors gaining access to cheap money to buy shares on the stock exchanges, leading to surges in the value of the Dow Jones Industrial average as well as the S&P500 and Nasdaq. With reduction in unemployment and noticeable improvement in several economic indicators, the consensus is that come Thursday September 19, 2013, the Fed Reserve would start to taper its QE program by reducing the volume of bond purchases by $10 billion.

The question is, how will the markets react to getting weaned off their “monetary cocaine”? Several markets will be on the watchlist as the financial world awaits the Fed decision. Several assets are bound to be affected:

a) The US Dollar
b) The dollar-backed commodities (crude oil, gold and silver)

For binary options traders, there are several trade options, and these will be based on the following decisions by the Feds:

No Tapering: Program left intact

The markets have factored in a tapering of the QE program. Unemployment is down (but not down to the benchmark of 7%), the stock markets are soaring and the US dollar has made significant gains against its peers. If there is no tapering, the markets will be surprised and we will likely see the US dollar sold off, with correspondent rise in the price of gold, silver and crude oil. The stock markets will also respond positively to the news.

Tapering by $10 billion

This is the consensus figure by which the Feds are expected to cut back on their bond purchases. If this materializes, expect the US Dollar to remain stronger, and for the stock markets and commodities backed by the US dollar to become weaker in the short term. These assets will regain strength once the markets adjust to the new situation. So short term weakening is expected, but long term strength will prevail if the recovery of the economy stays on track.

Tapering > $10 billion

This will shake up the markets and expect the US dollar to strengthen, and the commodities and stock markets to be sold off.

For binary options traders, decide on whether to choose the Call/Put options depending on the scenarios painted above.

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