While there has been a bump in volatility, it isn't being stoked by natural market forces, but by government manipulation of the markets. Thursday's announcement that the Federal Reserve, in conjunction with the Bank of England, Bank of Japan, European Central Bank and the Swiss National Bank, supports my notion that intervention does not lead to price stability but rather risky price action in which it's easy to be caught on the wrong side of a trade. Case and point: the EUR/USD rallied from 1.3771 to 1.3936 in a matter of twenty minutes following the intervention news.
With markets positioned for further easing by the Federal Reserve, I choose to remain on the sidelines for now until some definitive direction is given. While my medium- and long-term bias is for risk-aversion and thus favoring lower yielding currencies (GBP, JPY, USD) over higher yielding currencies (AUD, NZD, EUR), my short-term bias is flat until it is clear whether or not there will be further liquidity injections. Indeed, the intervention today has shifted my view slightly, and it could change further next week.
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