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THE CHORNICLES OF THE CURRENCY WARS

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THE CHORNICLES OF THE CURRENCY WARS 1

By Elizaveta Belugina, leading analyst at FBS Markets Inc., FXBAZOOKA.com

Elizaveta Belugina

Elizaveta Belugina

The Chronicles of Currency Wars. Part 1: Inception

Currency wars have truly become a phenomenon of the 21st century. Financial globalization has made individual countries more entangled with each other via trade and capital flows. Hence, the problems in one region get quickly transferred elsewhere.

In order to keep their economies ticking, some nations unleash the fastest and the easiest weapon – currency depreciation. Others then start shortly feeling the ill effects of such policy and respond with devaluation of their own currencies.

When it comes to the national currency, everyone wants to stay competitive. This desire has provoked a wave of monetary easing. The intensity of the easing is different from year to year, but the accommodative monetary policy is clearly prevailing over the restrictive one. Now currency wars are the new reality of global finance and risk becoming an ever-present element of the world’s financial environment.

The mechanics of QE: how it should work in theory

One of the main weapons of the contemporary currency was is the so-called ‘quantitative easing’ or QE. According to the definition, QE is a an unconventional monetary policy in which a central bank purchases government or other securities from the market in order to lower interest rates and increase the money supply. In more simple words, the purpose of QE is to revive economic growth. Note the word ‘unconventional’: the central bank uses QE when it needs to act, but has run out of standard measures. In particular, it means that the benchmark credit rate is already at its lowest.

The Chronicles of Currency WarsThe idea of QE is to provide commercial banks with liquidity so that they could increase lending to the real economy providing a vital stimulus for GDP growth. To do that the central bank purchases government and corporate debt from commercial banks. To pay the institutions for these securities it creates new electronic money. As a result, the central bank’s balance sheet increases by the quantity of assets it has purchased. This is why the easing is called ‘quantitative’.

Another reason why the commercial banks become eager to lend is that when the central bank buys government bonds or other assets, their supply goes down. This makes the price of the securities rise, and yields fall. As a result, the banking sector can earn more by lending money to business and consumers than by keeping securities which are bringing low interest.

The prospects of cheaper money is usually enough to lift the market’s confidence, so the announcement of QE is usually followed by the rally in stocks. Other effects of the increased money supply include higher inflation and devaluation of the national currency. While the first QEs were more about lifting economic growth, now the central banks of advanced economies ease to achieve higher price growth. Examples include the Bank of Japan and the European Central Bank. Whatever the purpose, QE tends to debase the national currency. On the one hand, lower currency is beneficial for the nation’s exports. On the other hand, massive devaluation of a certain nation’s currency is certainly not welcome by its trade partners. If the currency is important enough, it sets the currency wars in action. The US dollar is important enough.

America stroke the first blow

usTo be fair, Japan was the first country to resort to quantitative easing in the early 2000s. However, QE on the big scale originated in the United States as an aftermath of the global financial crisis.

US dollar is the most traded currency in the world. That’s why when America has launched itself into QE, it had a worldwide impact. By the end of 2008 the Federal Reserve cut its benchmark rate to near zero and then conducted 3 rounds of quantitative easing from that year and till 2014. The policy was designed and inspired by the Fed’s chief Ben Bernanke, the devoted advocate of monetary stimulus. Bernanke, also known by the nickname of “Helicopter Ben” for his remark about using a helicopter to drop off money to fight deflation, actually criticized Japan for its slow response to the economic crisis. So, when Bernanke was appointed the head of American central bank, he made sure he lost no time to fight the crisis at hand with as much monetary ammo as possible.

The scale of American easing is impressive. The Fed’s balance sheet has surged from around $700 billion at the beginning of the financial crisis to more than $4 trillion. All 3 rounds of the US QE were not the same. The very first one was aimed to cure the US from the credit crunch. It was considered necessary by the majority of economists and policymakers. QE2 and QE3 got more criticism. Although US economy did improve during these periods (especially during QE3), one of the main arguments against this type of easing is that financial markets turn into liquidity junkies and become too dependent on cheap money.

The Federal Reserve is often accused of thinking about the well-being of the stock market more than about the health of the real economy. Many experts worry that QE has created a bubble in the US stock market and that its eventual burst will be extremely painful for everybody. Even as the Fed has finished QE and is planning to start raising interest rates, there is no certainty that the US economic growth will be sustainable enough and that the nation’s stocks will keep performing well without the support of QE. Consequently, one can’t rule out the possibility of further easing in the foreseeable future.

Although the Fed denies that it is practicing competitive currency devaluation, quantitative easing programs exerted downward pressure on the dollar. Theoretically QE should have boosted lending to the US companies and households. In practice many banks invested outside of the US where the yields tended to be higher. To do that, they sold the dollar and bought foreign currencies. This made foreign currencies appreciate against the greenback. At the same time, the US actually exported its inflation elsewhere. As a result, many emerging nations had to raise interest rates. This made monetary inflows to them even higher pushing their currencies further up and hurting their economies. Since 2009 many states had to take measures to either devalue or at least check the appreciation of their national currencies. In 2010 Brazil’s finance minister Guido Mantega was the first one to spot an “international currency war”. You will find out about how this war developed in our next article.

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How has the online trading landscape changed in 2020?

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How has the online trading landscape changed in 2020? 2

By Dáire Ferguson, CEO, AvaTrade 

This year has been all about change following the outbreak of coronavirus and the subsequent global economic downturn which has impacted nearly every aspect of personal and business life. The online trading world has been no exception to this change as volatility in the financial markets has soared.

Although the global markets have been on a rollercoaster for some time with various geopolitical tensions, the market swings that we have witnessed since March have undoubtedly been unlike anything seen before. While these are indeed challenging times, for the online trading community, the increased volatility has proven tempting for those looking to profit handsomely.

However, with the opportunity to make greater profits also comes the possibility to make a loss, so how has 2020 changed the online trading landscape and how can retail investors stay safe?

Lockdown boost

Interest rates offered by banks and other traditional forms of consumer investments have been uninspiring for some time, but with the current economic frailty, the Bank of England cut interest rates to an all-time low. This has left many people in search of more exciting and rewarding ways to grow their savings which is indeed something online trading can provide.

When the pandemic hit earlier this year, it was widely reported that user numbers for online trading rocketed due to disappointing savings rates but also because the enforced lockdown gave more people the time to learn a new skill and educate themselves on online trading.

Dáire Ferguson

Dáire Ferguson

A volatile market certainly offers great scope for profit and new sources of revenue for those that are savvy enough to put their convictions to the test. However, where people stand the chance to profit greatly from market volatility, there is also the possibility to make a loss, particularly for those that are new to online trading or who are still developing their understanding of the market.

The sharp rise in online trading over lockdown paired with this year’s unpredictable global economy has led to some financial losses, but with a number of risk management tools now available this does not necessarily have to be the case.

Protect your assets

Although not yet widely available across the retail market, risk management tools are slowly becoming more prevalent and being offered by online traders as an extra layer of security for those seeking to trade in riskier climates.

There are a range of options available for traders, but amongst the common tools are “take profit” orders in conjunction with “stop loss” orders. A take profit order is a type of limit order that specifies the exact price for traders to close out an open position for a profit, and if the price of the security does not reach the limit price, the take profit order will not be fulfilled. A stop loss order can limit the trader’s loss on a security position by buying or selling a stock when it reaches a certain price.

Take profit and stop loss orders are good for mitigating risk, but for those that are new to the game or who would prefer extra support, there are even some risk management tools, such as AvaProtect, that provide total protection against loss for a defined period. This means that if the market moves in the wrong direction than originally anticipated, traders can recoup their losses, minus the cost of taking out the protection.

Not a day has gone by this year without the news prompting a change in the financial markets. Until a cure for the coronavirus is discovered, we are unlikely to return to ‘normal’ and the global markets will continue to remain highly volatile. In addition, later this year we will witness one of the most critical US presidential elections in history and the UK’s transition period for Brexit will come to an end. The outcome of these events may well trigger further volatility.

Of course, this may also encourage more people to dip their toes into online trading for a chance to profit. As more people take an interest and sign up to online trading platforms, providers will certainly look to increase or improve the risk management tools on offer to try and keep new users on board, and this could spell a new era for the online trading world.

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Trading Strategies

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Trading Strategies 3

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 4

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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