TECHNICAL A NA LYS I SFOREX FLAWS
badly
global liquidity
FED DECISIONCONSEQUENCES
deteriorates
USDFORECAST
END OF YEAR VOLATILITYTRADING
CFTC FXREGULATION
ABENOMICS 2.0
MANAGED FX &TRADING SYSTEMS
OCTOBER - DECEMBER 2015
TRADER MAGAZINE
WHAT IS HAPPENING TO US DOLLAR LIQUIDITY SERIOUS MACRO TRENDS DEVELOPING
FXCONTENTs
GLOBAL LIQUIDITY IS DETERIORATING BADLYDiscusses what is happening to US Dollar liquidity and the cost of borrowing in Dollars
50
The Dollar Blueprint Remains Bullish. Long-term Trend Remains Higher39
07 EDITOR’S NOTE
FUNDAMENTAL ANALYSIS
31 Trading GBP: What to expect in Q4?
19 New Zealand Dollar: Will the RBNZ close the interest rate gap?
MONETARY POLICIES
17 The Future of Central Bank Monetary Policy: Analyses t he consequences of Fed’s September decision
74 Conventional monetary policy has failed. Time for the Nuclear Option
TRAINING
21 Ask The Coach: ke y points to accelerate your learning process
AUTOMATED TRADING
64 The Seven Deadly Sins of Automated Trading: what to avoid to save time and build a sound trading system
42 Interview with Alex Nekritin: on Managed Forex and how to choose a trading system
TRADING STRATEGY
11 How Experts are Profiting on Historical Volatility, Now Through December: Shows how to profit from the fourth quarter’s large trading ranges, coupled with 2015’s increase in volatility
68 Trend following. One more step to trading success: Learn a strategy to identify the formation of a new trend and get in early
79 Your Guide to Letting Your Profits Run: simple steps to keep losses to a minimum and let profits run
TECHNICAL ANALYSIS
24 Interview with Jim Martens: Fresh insights from Elliott Wave International’s Senior Currency Strategist
35 Flaws in Trading with Classical Technical Analysis: highlights some technical analysis flaws when applied to Forex and how to trade price action reversals
MARKET REGULATION54 A Brief Survey of CFTC Regulation
of Select FX Products
TRADING PSYCHOLOGY
81 Consistency is the Real Holy Grail of Trading: how to build an attitude of discipline and control to reach your trading goals
BOOK REVIEW
78 Systematic Trading by Robert Carver
TECHNICAL REPORTS
85 Trends and Targets:USD Majors, Major CrossesEmerging & Asian Markets
85 Featured Markets: AUD/USD, EUR/NOK, EUR/ZAR, USD/THB
89 CONFERENCES & SEMINARS
INTERNATIONAL DATA
90 FX Spot Monitor91 Central Bank Rates92 Economic Data - FX Poll93 Markets View
94 ECONOMIC CALENDAR
USD FORECAST 48ABENOMICS 2.0What are the goals of Japan’s plan aimed at boosting potential growth and how it can affect the Yen
FX TRADER MAGAZINE July - September 3
MARKET WATCHFX
Global Liquidity is Deteriorating BadlySerious Macro Trends Developing
It is the market that makes the news, not the news making the market. Over the long term, markets are linked to macro fundamentals but these macro trends are generally slow moving, and rarely get reported on. Often times, the big macro trends are misunderstood by the consensus because they are either not widely reported on, or are difficult to spot in real time.
As discretionary macro traders, we are extremely interested in short-term market moves, as this is what will drive our monthly profit and loss. However, to try and position for big macro trends, we have to understand big macro drivers. Since Bretton Woods when the US Dollar became the global reserve currency, macro drivers do not come bigger than the US Dollar. To help understand
changes in economic growth and financial markets, we have to try and understand what is happening to US Dollar liquidity and the cost of borrowing in Dollars.
What we discuss below is purposefully meant to be simplistic and does not go into the minutiae of global monetary trends. What we want to illustrate is that global liquidity is tightening now
by Stewart Richardson
50 FX TRADER MAGAZINE October - December 2015
at a time when traditional assets such as equities and bonds are extremely expensive. Furthermore, financial markets have entered a period of greater volatility, global economic growth is weakening, and the last thing that is needed right now is a liquidity tightening exacerbated by higher interest rates in the US, especially if that makes the US Dollar even stronger than it has been.
First, we present a chart (see Chart 1) put together by Julian Brigden of MI2 Partners (for those interested, we believe Julian is one of the premier global macro thinkers around today, and his research is a must read) which illustrates the historical fact that when the Dollar has been too strong, bad things happen.
As can be seen, the crises that occur because the US Dollar has been too strong are usually most evident in Emerging Markets (EM). The Dollar is the global reserve currency and is used to price globally traded goods. It is also very often used as a source
of cheap borrowing when times are good therefore a strong Dollar simply increases economic and financial costs. When the costs have become too high, a crisis somewhere in the EM world has resulted.
We would also point out that as the global economy and financial markets become more interlinked, a strong Dollar will eventually affect the US economy and likely US markets. We have a whole raft of US companies blaming a strong Dollar for missing earnings forecasts, and economists
have been very quick to blame the strong Dollar as one of the reasons for US economic growth falling short of expectations in recent quarters.
Chart 2 illustrates the relationship between the US Current Account and Global GDP, and asserts that Fed QE helped bridge a large gap post the 2008 Global Financial Crisis.
The relationship between Global GDP and the US current account is as follows. Because so much global trade and financing of trade is done in US Dollars, the World needs an ever increasing supply of Dollars to grow. Prior to the financial crisis, the US supplied these Dollars via their current account being in deficit. Generally speaking, this worked pretty well, except when the supply of Dollars was not enough (usually because of tighter US monetary policy and/or a strong Dollar).
However, something structurally changed in 2010. As expected, the US current account deficit narrowed
Chart 1: when the Dollar has been too strong, bad things happen Source: MI2 Partners
US Current Account vs. Global GDP Source: MI2 Partners
FXMARKET WATCH
FX TRADER MAGAZINE October - December 51