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The currency market just got a lot bigger!
The currency market just got a lot bigger!
Thomas Fischer
• MBA
• 38 years in financial services
• Currency trader 1978-2000
• Jyske Bank/JGAM 2000 -2013
• Editor Currency Cross Trader
• Consultant ENR Asset Management
• Golf
• Copenhagen Marathon 05 4:10
• Copenhagen Marathon 07 4:08
The size of the FX Market 2013
• 5.3 Trillion US dollars every day!
• US dollar 87% of all trades
• UK (41%) & USA (19%) largest jurisdictions
Model Portfolio Theory
• Diversification reduce unsystematic risk
• Best level of diversification – efficient frontier
• Global diversification – currency overlay
• Systematic risk cannot be diversified away.
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US Efficient Frontier
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Active Currency Overlay
• Absolute return strategies
• Active Management seeking excess return (Alpha)
• Profitting from inefficiencies
• Allocating percentage to currency managers to get international exposure
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Global Efficient Frontier Active Currency Overlay
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Global Diversification
• Individual Stocks, Bonds & Currencies (no currency hedging)
• Global Funds (hedging within Fund)
• Regional Funds (hedging within Fund)
• Emerging Market Funds (hedging within Fund)
• Country Funds (hedging within Fund)
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Purchasing-Power-Parity
• Long term measurement based on inflation
• Fundamentals always right in the long run but….
• Currency rates affected by short term traders
• Currency risk needs to be watched 24-7
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Factors affecting currency rates
• Macroeconomic factors – GDP/Unemployment/Growth
• Interest rate differential
• Market trends – momentum/relative strength index
• Central banks
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FX As An Asset Class –why currencies make sense in an uncertain climate
• 24 hour trading
• Low spreads between buying/selling
• Liquid – daily volume $ 5+ Trillion (NYSE daily turnover $ 55 Billion)
• Many participants – difficult to manipulate markets
• Anonymous Trading
• Absolute returns
• Not correlating with other asset classes
• Even during the 2008 ”Meltdown” trading remain liquid
Returns in a Zero-Sum Market
• As the most liquid market in the world, shouldn’t currency markets be the most efficient, and so not offer consistent returns to investors?
• AND
• How can a zero-sum game (or a long-short market) such as currencies offer consistent returns to investors? Who are the systematic losers?
Liquidity-Seekers (or Non-Profit Seekers)
• International investors who buy bonds, equities, or credit, who either fully hedge their currency exposure, or do not hedge at all
• Central banks who buy or sell currencies in order to maintain an exchange rate policy
• Corporates who need to export, import or engage in FDI
• Tourists
Profit-Seekers
• Currency Managers
• Dedicated currency-only hedge funds
• Global macro hedge funds, who trade currencies as well as other markets
• Retail Traders (Trading platforms)
• Editor Currency Cross Trader
Analyzing Currencies like stocks
• GDP
• Interest rates
• Employment rate
• FDI
• Sentiment
• Charts
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EURO
• 11 member states introduced EUR January 1999
• Notes and coins were launched on 1 January 2002
• Today 17 member states
• 33% of all currency trades
• 27% of world foreign exchange reserves
Member States using Euro
• Belgium
• Germany
• Estonia
• Ireland
• Greece
• Spain
• France
• Italy
• Cyprus
• Luxembourg
• Malta
• The Netherlands
• Austria
• Portugal
• Slovenia
• Slovakia
• Finland
Euro Statistics
• GDP: 12,4 trillion USD (17 countries)
• Population: 332 million (17 countries)
• Government debt: 85% of GDP
• Unemployment: 12.1%
• 10 year bond: 1.76%
Eurozone alphabet soup!
ECB alphabet soup - explained!
• EFSF = European Financial Stability Facility created 2010 EUR 440 Billion
• EFSM = European Financial Stabilisation Mechanism created 2010 – EUR 60 billion
• SMP = Securities Markets Programme – ECB purchase in secondary bond markets – discontinued 2012 now OMT
• ESM = European Stability Mechanism created 2012 EUR 500 Billion
• LTRO = Long-Term Refinancing Operations existed since 1999 but Mario Draghi introduced 3 year lending in 2011 EUR 489 Billion in 2012 EUR 529 Billion
• OMT = Outright Monetary Transacions 2012 – ECB purchase secondary sovereign bond markets
The EURO Source: BCA
USD
• GDP 15, 6 trillion
• Population 316 million
• 50 states
• 87% of all currency trades
• 63% of World foreign exchange reserves
USD Statistics
• GDP: 15,720,000,000
• Population: 316 million
• National debt of GDP: 100%
• Unemployment: 7.30%
• 10 year Government bond 2.62%
EUR/USD
• All time high: 1.6038 (07/18/08)
• All time low: 0.8230 (10/26/00)
• Average since introduction: 1.2024
• Current: 1.3450
• Daily turnover: 1.3 trillion
Source: Jyske Markets
Currency Cross Trader
• Research and input from trading room
• Friday Updates
• Frequent trade recommendations
• Targets identified
• Leverage suggestions
• Visit The Sovereign Society booth
Thomas Contact Details
• 011-45-3880 0011
• 011-45-2526 9239
