Stefan Gerlach, Chief Economist at EFG Bank, argues that changes in the real exchange rate of the Swiss franc do not, in themselves, determine the degree of overvalution…
After the SNB abandoned the exchange rate floor of 1.2 CHF per euro in January 2015, the Swiss franc appreciated sharply. Between the end of December 2014 and the end of May 2015 it rose by 14%. Of course, it had appreciated strongly already in the years before. Overall, from the end of August 2008, the month before the collapse of Lehman Brothers that triggered the financial crisis, to the end of May 2015, the Swiss franc appreciated by 36% against the euro. However, between May 2015 and December 2017 it depreciated 11% against the euro.
But is the Swiss franc overvalued now? To think about that question it is helpful to make a distinction between bilateral and effective exchange rates, between nominal and real exchange rates and to consider the uncertainty that surrounds the “equilibrium” real exchange rate.
Some exchange rate concepts
While the euro area is Switzerland’s single largest export market, exports to other economies are also important.
In assessing whether the Swiss franc is overvalued it is therefore not sufficient to look solely at the bilateral exchange rate to the euro. One should also look at theexchange rate against Switzerland’s trading partners more generally, that is, at the effective exchange rate of the Swiss franc.
Furthermore, since exchange rates often move to offset inflation differentials, it is helpful to look at the real effective exchange rate, which captures the relative price of Swiss goods and services against a broad set of countries. It can be computed by multiplying the nominal effective exchange rate of the Swiss franc with the Swiss CPI, and dividing by the consumer price indices in Switzerland’s trading partners.
Figure 1. shows that both the nominal and real exchange rates of the Swiss franc appreciated over the period 1973- 2017. The two exchange rates are export-weighted, that is, they are effective exchange rates. Between December 2014 and May 2015, the real effective exchange rate rose by 11%. The total real appreciation from August 2008 to May 2015 was 29%. Between May 2015 and December 2017, however, the Swiss franc depreciated by 10% in real effective terms.
As can be seen in the figure, over short periods of time, changes in the real exchange rate are dominated by changes in the nominal exchange rate. The reason for this is that the Swiss and foreign price levels evolve only slowly. Thus, while the exchange rate can change by a few percentage points in a day, price indices typically change by a few percent in a year.
When talking about exchange rate changes over a month or even a few years, there is therefore little to be gained in making a distinction between real and nominal exchange rates. But over longer time horizons the distinction becomes important; the figures show that the real exchange rate of the Swiss franc has appreciated much less than the nominal exchange rate.
While monetary policy strongly influences the real exchange rate in the short-term, it has no impact over longer periods of time. The reason is that it has two offsetting effects. While tight monetary policy leads the Swiss franc to strengthen, after some time it also reduces Swiss inflation. The effects of monetary policy therefore wash out.
Figure 1. shows that the Swiss real exchange rate appreciated from an index value of 72 in January 1973 to a value of 112 in December 2017, or by about 56% (or by 1.3% per year). If monetary policy does not explain that appreciation, what does?
Since the real exchange rate is a relative price, it is determined by the same factors as other relative prices – changes in demand patterns. Thus increases in the demand for Swiss goods and services will tend to appreciate the real exchange rate. Switzerland exports high-end products, ranging from watches to specialty chemicals, whose demands tend to increase strongly as world income rises. Furthermore, these goods are relatively price-insensitive. It is therefore natural to expect the Swiss franc to appreciate over time.
Is the Swiss franc overvalued?
Is the Swiss nominal exchange rate too high, given prices in Switzerland and in the rest of the world? To answer that question, it is necessary to form a view about the “equilibrium” real exchange rate. Unfortunately, that level is unknown and must be estimated. One way to do so is to fit a statistical model to the real exchange rate and compare the current level with forecasts made in the past (since such forecasts will settle at the equilibrium level after any temporary dynamics have worked themselves out).
Figure 2. provides the results of such an exercise. Here a simple model of the real exchange rate is estimated on data from 1973 to 2006. The model assumes that the equilibrium real exchange rate follows a linear trend, and thus implies that the Swiss franc is expected to continue to appreciate in real terms in the future. If the actual real exchange rate deviates from the equilibrium level, it is expected to revert to the equilibrium level. It is worth pointing out that this approach assumes that on average over the estimation period the exchange rate was at the equilibrium level.
Next the model is used to forecast the real exchange rate over the period January 2007 until the end of 2017. Since the equilibrium level is estimated, it is subject to some uncertainty. To assess the degree of uncertainty an approximate 70% confidence band is plotted.
The figure shows that the real exchange rate was quite weak at the end of 2006. Consequently, forecasts made at that time suggested that it would strengthen quite quickly towards the equilibrium level, and subsequently appreciate further together with the equilibrium level. At the end of the sample, in December 2017, the actual real exchange rate index is 112.1 and the equilibrium level is estimated to be 107.1, with a 70% confidence band of 100.6 – 113.9.
Overall, these results suggest that while the real exchange rate is about 5% stronger than the estimated equilibrium level, it is well within the margin of uncertainty surrounding the equilibrium real exchange rate.
The Swiss exchange rate appreciated strongly after the SNB abandoned the floor against the euro in early 2015. While this was a complication for Swiss exporters and the Swiss tourist industry, the Swiss franc has historically been appreciating. Furthermore, the real exchange rate of the Swiss franc – the relative price of goods and services in Switzerland – has also increased gradually over time, although a slower pace.
But looking at changes in the exchange rate is not enough to determine if the Swiss franc is overvalued. To do so, the real exchange rate must be compared to its “equilibrium” level, which must be estimated. It appears that in December 2017 the Swiss franc was a little overvalued, but not so much as to be outside the margin of error that is inherent in the estimation.
 The real exchange, Q equals E × P/P* where E denotes the price of the Swiss franc, P the Swiss consumer price index and P* the foreign price index.
 The real exchange rate is measured using consumer prices and is against Switzerland’s 24 most important export markets.
 Another reason is that Switzerland has a large service sector which naturally displays a higher inflation rate than the goods sector since productivity growth in services is lower.
Gold-i Integrates with CryptoCortex
Gold-i has integrated with CryptoCortex – an advanced digital asset trading platform from EPAM Systems, a leading global provider of digital platform engineering and development services. This provides financial institutions with increased access to multiple market makers and fully cleared cryptocurrency products available via Gold-i’s CryptoSwitch 2.0™, part of its Matrix multi-asset liquidity management platform.
The integration was completed following a request from a Gold-i client wanting to use the CryptoCortex platform to access liquidity from Hehmeyer and Shift Markets via Gold-i’s CryptoSwitch 2.0™.
Tom Higgins, CEO, Gold-i comments, “As digital asset trading continues to gain momentum amongst brokers, Prime of Primes and hedge funds, a key part of our strategy is to ensure that the cryptocurrency liquidity available through Gold-i’s liquidity management platform is easily accessible, regardless of which trading platform clients are using. CryptoCortex is one of the most advanced platforms for digital asset trading, therefore integrating with them was a logical step for Gold-i.”
“We are delighted to partner with Gold-i to provide our customers with real-time, event-driven processing and analytics that not only meets their essential needs but also delivers actionable intelligence,” said Ilya Gorelik, VP, Real-Time Computing Lab at EPAM. “Financial markets are among the fastest moving markets around, and with cutting edge tools – like CryptoCortex – that make data readily available, customers can quickly implement the best decisions possible.”
CryptoCortex is the most advanced institutional cryptocurrency trading platform on the market, providing a complete 360-degree solution for brokers/dealers, exchanges and buy-side trading firms. It has been developed by Deltix (now EPAM Systems), based on over 10 years’ experience in building, deploying and supporting institutional-grade intelligent trading across equities, futures, options, forex and fixed income.
Gold-i Matrix offers multiple routing and aggregation methods, leveraging connections with over 70 Liquidity Providers. It is super-fast and highly flexible, helping financial institutions worldwide to make more money and reduce risk. It supports FX, CFDs and cryptocurrencies in a single solution which is fully compatible with the Gold-i Crypto Switch. Crypto Switch™ 2.0, provides brokers worldwide with a fully cleared cryptocurrency product and a cost-effective, efficient means of accessing multiple cryptocurrency market makers who can provide deep pools of liquidity as a CFD or physical asset. For further information, visit www.gold-i.com.
5 Questions to Ask Yourself Before Trading Penny Stocks
Anyone and everyone from all corners of the world can trade from their comfort of their own as all that is needed is a computer and an internet connection.
Many people chose to trade complex asset classes like crude oil futures. But penny stock trading is preferred to many new traders because it is a lot easier to understand the stock market than the global oil market. Trading penny stocks is also cheaper to get started as some brokers have no minimum deposit requirement.
So how do you know if trading penny stocks is right for you? Here are five questions you need to ask yourself first.
1. Do You Have the Right Financial Motives?
Why exactly do you want to trade? If you want to trade to become a millionaire within a year or two despite little or no experience, trading most certainly is not right for you. Trading stocks involves risk but penny stocks could be even riskier.
Ask yourself if the money you want to risk trading penny stocks is needed for important expenses. Trading with rent money or your children’s education fund with the hopes of doubling is not the right mindset to have.
And forget about sustaining yourself with a guaranteed income at any point in your trading career. There is no magical number but you need enough money to cover at least six months’ worth of expenses while learning how to day trade.
But do you have a backup plan if your money runs out faster than expected? Can you call it quits earlier than expected and return to a regular job?
The appropriate and responsible path is to take a few months to learn how to properly and responsibly trade penny stocks. Learning the true ins and outs of penny stock trading strategies can unlock the potential for explosive returns.
2. Do You Have the Right Schedule?
Trading penny stocks for many people is a full-time job. But some people can get away with trading penny stocks as a hobby if they are available at only certain times of the day.
It is absolutely vital for penny stock traders to be alert and at their trading station at least an hour before the stock market opens. During the pre-market session, a trader is scanning the large universe of penny stocks to evaluate what stocks they will be buying and selling.
They might be looking at the news for a biotechnology company that released results from an encouraging clinical study trial. Or, they are looking for a company that announced a major contract win that would double or triple their sales.
So once 9:30 AM ET hits and the trading session official starts, a trader is well prepared.
But someone who is only available to trade penny stocks as of say 9:15 AM may not have enough time to prepare themselves for the fast action.
Similarly, traders that start their day in the afternoon session will miss out on many of the early movers and there is simply less opportunity from 12:00 PM to around 3:30 PM.
Part-time traders that start early enough can get away with ending their trading session before noon.
If you don’t have the right schedule due to work schedule, family obligations or you are in a different time zone, then penny stock trading during the off-hours might be a tedious task that offers little reward.
Source: Google Finance. (Ticker $MREO, daily chart from Dec. 18): This shows how early traders were able to capitalize on the strong gains and late traders missed out on a major surge.
3. Are You Motivated to Learn?
The day trading universe is open to anyone that wants to open an account and deposit money and no prior experience or knowledge is required.
But ask yourself first what do you really know about the stock market universe and how much are you willing to learn. Do you know how to read and understand Level 2 charts? Do you know the importance of SEC disclosures? What about evaluating what impact a poor earnings release will have on a stock’s movement.
It is OK not to know the answer to these dozens of other similar questions. But do you have the drive and dedication to learn from scratch? Do you have what it takes to read books and watch educational videos for weeks at a time? While this could be seen as an exciting process and an opportunity to learn a new skill, a lot of hard work and dedication is required to succeed.
4. Do You Know the Difference Between Trading And Gambling?
The general public shouldn’t be faulted for correlating trading penny stocks with gambling. They may have seen headlines about how the global COVID-19 pandemic prompted many bored sports bettors to find excitement and action in stocks.
But there is a fine line between trading penny stocks and gambling. Do you know the difference between the two? Gamblers will pick a penny stock — any penny stock and buy shares and simply hope for the best. They have no knowledge of what the company does, nor do they really care. They either make money on a trade or don’t.
Penny stock traders on the other hand have a strategy that has been developed, revised, and improved on over months if not years. They know how technical analysis can be used to determine an entry point, how to analyze volume trends, and where to get their news and information.
Perhaps more important, they know how vital it is to have an exit strategy as part of every trade and then to just move on.
Gamblers on the other hand love to double down when they are losing. If you are a gambler that is fine. Just be aware that the individual on the other side of your trade knows way more than you do about stocks and will be happy to take your money.
Which one are you? If you are a trader and know how to be disciplined and cautious then trading might be right for you.
Conclusion: Be Honest with Yourself
Trading penny stocks involves risk and many new traders fail. Checking off a bunch of answers from a checklist is useless and meaningless unless you are honest.
At the end of the day, only you can determine if trading penny stocks is truly the best move for you professionally. A broker certainly won’t be asking you these questions. It is not their responsibility to do so.
So be honest with yourself. If you really want to trade penny stocks but recognize now isn’t the ideal time for financial reasons or you have the wrong mindset there is nothing preventing you from giving it a shot in six months or a year.
This is a contributed article
Why the rise of retail FX is here to stay
By Michael Kamerman, CEO Skilling
2020 has been a tumultuous year for both the world and for financial markets. The events of this year have changed the very course of how we’ll live our future lives. Alongside the disruption of daily routines, the coronavirus disease has disrupted the global financial markets at systemic levels kicking in a global stock market crash in February this year. Sure, things look good now, but remember how you felt in early March?
The Coronavirus Crash had sent financial markets plunging into the fastest, most precipitous fall ever recorded in history and the most devastating since the Great Crash of 1929 – signalling in turn the beginning of a worldwide Covid-induced recession.
Certain industries have been hard-hit with many businesses unfortunately falling into insolvency. Many others are still fighting to survive the global lockdowns that threaten their existence. The new realities inflicted by the pandemic have also given rise to a new set of consumer needs and have as a result driven surges of interest in some sectors.
While the headwinds of Covid-19 have made this a chaotic year, the changing lifestyles of consumers have fueled the growth of other more fortunate industries. These include, for example, online retailers, home-delivery services, pharmaceuticals and biotech, video streaming services as well as… online trading. And a sector experiencing outsized growth in online trading is retail FX and CFD trading. Yes, the novel coronavirus pandemic has jolted foreign exchange and CFD trading because of bust-and-boom movements brought on by extreme volatility in fear-led markets.
Volatility is the Mother of Opportunity
When it comes to trading, volatility is the mother of opportunity. It has always been the case for trading speculative markets. This explains why the global FX market daily turnover hit $6.6 trillion earlier this year, with a 40% increase in day-to-day trading volume compared to the last decade.
Pre-Covid-19, the forex industry was relatively muted. Economic outlook was more certain, with relatively subdued market volatility, while a steady stream of traders were trickling into the market. As such, industry focus was on diversification and future-proofing business models.
Volatility, the likes of which we have experienced this year, feels like a once-in-a-lifetime occurrence, and one effect has been a surge in customer acquisition numbers in FX. With trading platforms having spent recent years optimising their online capabilities, the proliferation of people looking for innovative ways to capitalise on market movements and take control of their finances while under lockdown has, in a sense, been the ultimate proof of concept for the industry.
A continuation of this trend is very likely as countries across the world fight to keep the virus under control. Even with a vaccine on the horizon, record levels of government debt, high unemployment, and negative interest rates are creating a cocktail that is driving many people to seek greater financial independence, whether they are novices or experienced traders. Turning to the retail trading market in these circumstances can make for extraordinary tales, both in terms of wins and losses.
A rise in trading in pursuit of financial independence
Undoubtedly, the world has never spent more hours in front of screens as it has this year with the importance of online access to practically anything taking center stage. Simultaneously, personal finance has been high on people’s agendas, with the impact of the pandemic posing an existential threat to the income of millions of people.
This has driven greater appetite to participate in online trading, and the unpredictability of the 24-hours news cycle has created both confusion, and a sense of opportunity with aspiring traders.
In the wake of widespread redundancies and pay-cuts, people’s outlooks are shifting towards wanting to best monetise their time. This entry of new players into the market has happened in tandem with more experienced traders and investors sensing an opportunity to grow their own portfolios. Thus, one outcome of this year appears to be a shared desire from people to take a far more active role in protecting and growing their finances.
An era of more experienced traders
A positive outcome of this year’s situation is that new entrants have been those keen to study and learn about the markets. Indeed, the challenges that the world has faced this year are so unique, that from an economic perspective, they warrant examination, and are being used as a learning exercise.
Reliable and trustworthy brokers have provided a safe environment for traders to both test and develop their trading strategies. In doing so, traders have been able to grow their skills by learning how to navigate volatility and beginning to execute more substantial trades. Time spent on practice is increasingly more valuable to protect oneself against riskier and lesser-known market variations, particularly in the current climate.
The next six months aren’t likely to be a smooth ride. Volatility is set to continue, bringing with it greater trading volumes and greater opportunities for trader upskilling.
Good news lies ahead – for the world, and the world’s traders.
It is unfortunate that traders and investors stand to capitalise on higher returns during devastating situations that create heightened volatility, but this is the truth nonetheless and part of the essence of investing. The outlook of markets remains to be an indication of where the world is also headed. And that is not all bleak. The stock market bounced back relatively quickly in March, with share prices rising sharply even though many of the world’s developed economies were and are still suffering one of the worst recessions in living memory. Why? This is because, theoretically speaking, share prices are based on anticipated future expectations and income streams.
A most recent example is seen in Airbnb’s extraordinary IPO, making it one of the greatest success stories in the 2020 stock market. The success is clearly not based on Airbnb’s growth in revenue over the past year (when travel basically came to a complete halt). Investor demand was fueled by the hope and anticipation that pre-pandemic life will return and the global travel industry will be revived.
The overall global long-term outlook is a positive one, and the pandemic and associated recession is expected to give way to an economic recovery. What is for sure though is that the road to recovery is a long one, and market participants are to actively assess and reassess their investment and risk management strategies. The key to being in a better position to exploit the opportunities that arise in the markets is to be better able to mitigate the higher risk that comes with the unpredictable volatility of pandemic times.
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