Bi-weekly forex market analysis brought to you by industry experts

1. SYNERGY FX ALERT
BY TODD DEITERICH | 22.05.15
REPO RATES SIGNAL FED LIFT OFF HAS COMMENCED
One of the biggest debates in the financial markets is when/if the FED will begin normalizing US interest
rates.
Most investors watch the economic releases and listen to the FED Governors to get an idea of when the
FED will officially raise the FED Funds rate from its current 0 to .25% target range.
However, due to the enormous expansion of the FED's balance sheet from $400 billion to over $3.5 trillion
during QE 2, the role of the FED Funds rate has been diminished to the Reverse Repurchase Rate (RRP).
In the statement which followed the March FOMC meeting, FED chief Janet Yellen made direct reference
to the RRP open market operations as a way of creating a "soft floor" for overnight rates and a temporary
increase to the daily limit to $300 billion.
In plain English, this means that until the FED's balance sheet is reduced by draining liquidity out of the
system via RRP, the net impact of raising the FED Funds target band would be zero.
As such, the most accurate indicator to follow the FED's progress towards lift off is the Reverse
Repurchase rate and size. Following these open market operations as a guide, the last two RRP actions
have had a rate of .18% and .22%, respectfully.
Also, the use of the RRP facility will reduce the risk of an outsized market reaction once the FED funds
rate is officially announced and lifted.....since it will have already been lifted in the RRP market.
As US Q2 data continues to be released with mixed results, we expect the RRP aspect of FED policy to
begin to point to the "lower bar" for an official FED lift off and a generally better tone in the USD.
The EUR/USD has fallen sharply since Monday on comments from the ECB that QE will be frontloaded
into May and June to avoid liquidity issues during the summer months. With the US celebrating Memorial
Day on Monday, we expect the market to thin out by mid-NY time.
Intra-day, Synergy FX suggests looking to sell the EUR/USD up to the 1.1180 level for a break of the 1.1065
support line next week.
The AUD/USD has pushed back over the .7920 level as Iron ore prices rebounded somewhat overnight.
We still see the Aussie in a downtrend and will look to add to short positions if it pushes up against the
.7950 level.
The USD/JPY traded as high as 121.40 this week which represents a clean break out of the 2 month range
trade. The Ministry of Finance portfolio flow data showed that the BoJ has stepped up buying foreign
bonds as part of their QQE program.
Synergy FX suggests looking to scale in to long USD/JPY positions at the 120.60 level for a move back over
121.85 in the near-term.

2. The GBP/USD got a big push from yesterday's stronger retail Sales data and traded below .7100 in the
EUR/GBP for the first time since March. We suggest short-term traders can look to sell GBP/USD at 1.5575
on a stop for an initial target of 1.5340 with a 1.5755 stop.
SYNERGY FX