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Can you profit from market volatility and protect your assets?

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Can you profit from market volatility and protect your assets? 1

By Dáire Ferguson, CEO at AvaTrade

From Brexit through to the Coronavirus pandemic, high levels of volatility in the currency markets have become a familiar sight in recent years. With extreme highs and lows come abundant opportunities to make substantial financial gain. Yet with this comes great risk. Dáire Ferguson, CEO at AvaTrade, explains how traders can profit from market volatility without jeopardising their assets

Every good trader knows that greater levels of market volatility equal greater opportunity for profit. The foreign exchange (FX) market, for instance, can be incredibly lucrative when navigated well – with 24/7 trading possibilities and regular fluctuations on major currency pairs allowing traders to net a handsome profit. Naturally, in times of higher volatility, it is not only the scope for profit that grows significantly, but also the potential for loss. Coming down on the right side of the two is a question of balancing risk and reward. This can be a tricky calculation, but there are tools on the market – such as investment protection and options trading – that can help minimise the likelihood of loss significantly.

Market volatility

We need not look far for examples of extreme market fluctuations. The past five years have been dominated by significant and unpredictable political and social events, prompting strong and frequent reactions from markets. In 2016, both Brexit and Donald Trump’s election triggered widescale political disruption in the UK and the US, creating the perfect climate for traders with the foresight to profit from the resultant peaks and troughs in the GBP/USD. Since then, ongoing US-China trade wars and increasing protectionism have further rocked the boat, and – more recently still – the global COVID-19 pandemic has meant that sterling has suffered extreme fluctuations, hitting a 35-year low in March of this year.

Over the course of these events, we have seen highs and lows in currency that a shrewd trader could convert into significant profits. December 2019 saw Boris Johnson achieve a majority of 80 seats in the House of Commons on the day of the results of the general election, leading the GBP/USD to reach a high of 1.3114, yet this quickly dropped 11 days later, following the Prime Minister’s ruling out of an extension to the post-Brexit transition period, with GBP/USD reaching a low of 1.2904 on the 23rd December. Moving into the new year, the UK announced its official exit from the EU at the end of January, and GBP/USD held a steady range between 1.2950 and 1.3200 up until the coronavirus outbreak.

At this point, the global introduction of increasingly stringent measures to combat the spread of the virus saw the FTSE 100 plunge by over 8% – the largest intraday fall since the 2008 global financial crisis – on the 10th March. In addition, the Bank of England cut rates to 0.25%, the lowest level in history. Resultantly, on the 19th March, GBP/USD reached a 35-year low of 1.1410 – a drop of 0.18 compared with highs earlier in the year – before recovering slightly as negative news about the escalation of the pandemic in the US lowered the value of the dollar. Currently, the GBP/USD rate holds a range between 1.2070 and 1.2600.

The above fluctuations give ample scope for profitable trading. Someone selling GBP/USD on the day Boris Johnson was elected, for example, would have stood to make around a 13% profit on their investment if they then bought it back ahead of the Bank of England announcement on the 19th March. Alternatively, had they purchased GBP/USD at the height of bullishness surrounding the Johnson election, expecting further gains, they would soon have been hit first by the rising prospect of a no-deal Brexit and then by the onset of the pandemic in the UK. Retreating back to dollars in March ahead of the Bank of England announcement (in fear that the pound would continue to plummet) would have netted them a double-digit loss. Timing is critical, but foresight is not always possible. Given the unprecedented nature of the current situation, we could still see more extreme drops – so making sure risks are contained where possible is key to success.

How can we trade safely?

While even the savviest of traders can fall victim to a sudden drop in currency price, there are measures that can be taken that limit downside risk, making this type of trading much more accessible to

Dáire Ferguson

Dáire Ferguson

the wider public.

One approach is to use a risk management tool to protect your investment. Commonly used by fund managers, this type of product is still relatively new to the retail market, but it can give traders of all kinds the flexibility and support to trade with confidence in riskier climates. AvaTrade’s risk management product, AvaProtect, for instance, gives clients the opportunity to purchase total protection against loss for a defined period once a position has been opened. As a result, no matter what direction the market takes, traders are safe in the knowledge their trades have been protected for the period they have opted to cover them for.

Options trading also offers more sophisticated ways to hedge risk, with traders buying and selling of financial contracts that allow the purchase or sale of an underlying asset for a certain price within a set period of time. Traders can either buy a call option – giving them the right to purchase an asset at a given price – or a put option, entitling them to sell at a given price. Rather than committing capital up front, the only exposure a trader takes on is the premium charged to buy the option. If, after buying an option, the market does not move in the direction it was expected to, the trader does not have to invest the rest of the capital they put on the trade, giving them far greater flexibility and cutting potential losses.

As such, profiting from market volatility can be made safer and more accessible with the right knowledge and tools. With more and more forex trading platforms coming to market every year and the technology they offer constantly evolving, new features are constantly emerging that can make it easier for traders to capitalise on their convictions and seize opportunities without overcommitting. The result is that, today, even relative newcomers to the market have access to the tools and support they require to trade with confidence.

 

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Wall Street set for higher open as bond markets calm; PMIs in focus

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Wall Street set for higher open as bond markets calm; PMIs in focus 2

By Elizabeth Howcroft

LONDON (Reuters) – European shares jumped on Monday as bond yields stayed below their recent spikes, while risk assets also rallied and Wall Street futures indicated the optimism would continue into the U.S. session.

The rise in European shares followed solid gains in Asian stock markets and saw the STOXX 600 up 1.2% by 1202 GMT. London’s FTSE 100 1.1% higher and Germany’s DAX up 0.7%.

The MSCI world equity index, which tracks shares in 49 countries, rose 0.4%, recovering from the previous session’s multi-week low.

The much-anticipated $1.9 trillion COVID-19 relief bill was passed in the U.S. House of Representatives on Saturday, and now moves to the Senate.

In the bond market, key yields fell from highs seen last week when market participants became wary that when economies re-open from coronavirus lockdowns a combination of massive government stimulus and pent-up consumer demand will cause inflation to accelerate.

The U.S. 10-year treasury yield was down around 3 basis points at 1.429% at 1207 GMT, having dropped from Thursday’s one-year high of 1.614% – although it did edge up slightly overnight.

Germany’s benchmark 10-year Bund yield was down around 5 basis points, also below last week’s spike.

Germany 10-year

Wall Street set for higher open as bond markets calm; PMIs in focus 3

“I think more than anything, people were spooked at the speed of the rise, rather than anything else,” said Michael Hewson, chief market analyst at CMC Markets UK.

“The markets are pricing in a (U.S.) rate hike for next year, and a couple in 2023, and that’s what the Fed needs to push back against – and they haven’t done that aggressively enough.”

He said markets were being boosted by expectations that U.S. Federal Reserve officials due to speak in coming days will provide stronger verbal signals against the rise in bond yields.

“There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields,” wrote Deutsche Bank strategist Jim Reid in a note to clients.

“They simply can’t afford to see it happen with debt so high.”

PENT-UP DEMAND

PMI data for February is also in focus this week. Germany’s factory activity rose to its highest level in more than three years last month, driven by higher demand from China, the United States and Europe.

Manufacturing in Japan grew at its fastest pace in more than two years in February, as strong orders led to the first output rise since the start of the pandemic.

But China’s factory activity grew at a slower pace than in the previous month, missing market expectations, after COVID-19 related disruptions earlier in the year.

Oil prices jumped on Monday, with Brent crude futures and U.S. West Texas Intermediate (WTI) crude futures both up around 1% at 1221 GMT.

Front-month prices for both contracts touched 13-month highs last week. Both contracts ended February 18% higher.

The dollar rose, gaining 0.3% against a basket of currencies by 1222 GMT. The Australian dollar – which is seen as a liquid proxy for risk appetite – recovered some recent losses.

Wall Street looked set for a higher open, with S&P 500 futures up 1.1%. Nasdaq futures were up 1.3% at 1223 GMT, suggesting a recovery for tech stocks.

Bitcoin recovered some recent losses, up 5% at around $47,676 at 1227 GMT.

Also helping sentiment was news that deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.

(Reporting by Elizabeth Howcroft, editing by Ed Osmond and Susan Fenton)

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We need more crypto companies to IPO to increase digital asset scrutiny and adoption

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The potential and pitfalls of paying your way in crypto

By Stephen Ehrlich, Co-Founder and CEO at Voyager Digital

As a publicly listed digital asset trading business, the recent announcement of Coinbase’s IPO has naturally put a spotlight on us at Voyager Digital and we welcome their move as it will improve trust, transparency and above all, adoption of digital assets. It is imperative that the crypto asset space ups its game as there’s still a great deal of scepticism and concern in respect to their legitimacy or even purpose. This scepticism comes even at a time when several well-known household institutional names have entered the space in 2020.

But there are more than just signs that the mood is changing, with even some of the die-hard naysayers starting to accept that Bitcoin and crypto assets are here to stay.

The regulators are slowly coming to the table with the introduction of new rules, for example the US’s SEC is looking to impose greater KYC (Know Your Customer) on crypto wallet providers and France, a vocal advocate of the emerging blockchain technology and digital asset space, is looking to implement anonymity measures to fight money laundering activity.

Stephen Ehrlich

Stephen Ehrlich

Being a publicly listed company naturally provides an extra level of transparency and today there are quite a few digital asset focused public companies ranging from Bitcoin miners, crypto investment companies and in Voyager Digital’s case, crypto brokerage firms that allow investors to buy and sell crypto.

Over the Christmas and holiday period Bitcoin has continued its stratospheric rise showing further evidence that investors are hungry for alternative assets. With traditional markets being closed for public holidays, people have had time to read, research and because crypto-assets trade 24/7 they can take action. So while many around the world will have been trying to forget the trials and tribulations of a torrid 2020 by gorging on turkey or goose and opening presents, many investors will have been buying Bitcoin.

This is a trend we expect to continue well into 2021 and beyond. As people become more accepting of the digital asset space and adoption increases, more crypto based businesses will pursue the IPO route and become public companies. This process should become a self-fulfilling prophecy, bringing a greater proportion of the space under the regulatory regimes of stock exchanges and allowing anyone to dig deep into the business, providing greater scrutiny.

But this expansion will present regulators across the globe with multiple challenges. As Bitcoin and other crypto-assets are borderless, it allows brokers such as Voyager the ability to expand quickly, providing secure trading platforms to meet the demand of wider adoption. Regulatory hurdles will be overcome though as we are already seeing forward-thinking Central Banks and established regulators embracing this new asset class and the technology underpinning them. By working with regulators, established crypto businesses and in particular publicly listed ones, can help forge the way for the industry.

The future for crypto assets, Bitcoin in particular, looks bright and we look forward to playing a major role.

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Risk currencies, bitcoin recover as yields steady

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Risk currencies, bitcoin recover as yields steady 4

By Julien Ponthus

LONDON (Reuters) – The Australian dollar and other riskier currencies rebounded against the U.S. dollar on Monday as U.S. Treasuries recovered from last week’s losses.

The benchmark 10-year U.S. bond traded at 1.4153%, well off Thursday’s one-year high of 1.614%.

“The bond market and risk assets are showing signs of stabilisation after the big sell-off last week”, ING analysts commented, expecting that “the dollar’s corrective rally should pause for breath”.

Equities and commodities sold off last week as the debt rout unsettled investors and lifted demand for safe-haven currencies, including the U.S. dollar. [MKTS/GLOB]

Early today, the risk-friendly Australian dollar jumped 0.5% to $0.7743 following a 2.1% plunge on Friday.

The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday, and markets expect it to reinforce its forward guidance for three more years of near-zero rates.

The New Zealand dollar strengthened 0.46% to $0.7259, recovering some of Friday’s 1.9% slide.

The dollar index rose 0.26% to 91.02 after posting its biggest surge since June on Friday.

The euro fell 0.12% to $1.2056, after dropping 0.9% at the end of last week, the most since April.

Pressure has been growing on the European Central Bank to act against rising yields in the euro zone. Traders will focus on a speech later this afternoon by President Christine Lagarde.

“There is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields. They simply can’t afford to see it happen with debt so high”, Deutsche Bank strategist Jim Reid told his clients in a morning note.

The British pound drew additional support from bets on a faster vaccine-led economic recovery. Resurgent risk appetite pushed the safe-haven Japanese yen to a six-month low versus the dollar.

Sterling rose 0.17% to $1.3945.

Against the yen, the dollar hit a six-month high of 106.70.

In cryptocurrency markets, bitcoin rose 4% to $47,069 but was still off a record high of $58,354.14 hit on Feb. 21.

(Reporting by Julien Ponthus, editing by Larry King)

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