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Global Macro Trading ”Focus on the Big Picture And Ignore Everything Else”. Antonio Sousa Chief Strategist For DailyFX FXCM, New York City . Disclaimer.
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Global Macro Trading”Focus on the Big Picture And Ignore Everything Else” Antonio Sousa Chief Strategist For DailyFX FXCM, New York City
Disclaimer Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The contents provided in this seminar are subject to change at any time without notice. There is no guarantee that the systems, trading techniques, FX PowerCourse, trading methods, indicators or other information presented at this seminar will result in profits or not result in losses. The content is provided for informational purposes only and is not intended as a trading recommendation.
Global Macro Trading Imagine that you are looking at a perfect up trend in the AUD/JPY. Now, assume the world economy is growing , commodities are rallying and higher yielding currencies are outperforming currencies with low interest rates like the yen (2002-2006). Would you buy this currency pair?
Global Macro Trading “Focus on the Big Picture And Ignore Everything Else” Any Technical Analysis expert would recommend you to buy currencies that are in a strong up trend. However, in this case that would be a terrible investment decision! A Global Macro trader avoids this type of mistakes by ignoring short-term events like intraday trends and news releases. Instead, a Global Macro Trader looks for big shifts in global economic trends, usually caused by changes in interest rates, fiscal policy, current account, risk aversion and changes in speculative positioning.
Global Macro Trading The chart below is a real world example which shows that is difficult to find a perfect technical analysis setup. In fact, even though the Australian dollar was in an up trend during 7 years, it took only 3 months for the AUD/JPY to lose more than 40 percent. Global Macro View : The recent financial crisis is triggering an unprecedented carry trade unwind and with the world economy slowing down is reasonable to think that the demand for commodities will also begin to dry up which could make high yielding currencies like the Australian dollar very vulnerable going forward.
The Recent Financial Crisis is a Big Global Macro Event The credit storm that began in the United States is now affecting the entire world and the implications are so serious that need to be accounted for in all of your investment decisions. Performance of Stock Markets (last 12 months) The big question is whether the bailout will impact the status of the Dollar as a world reserve currency? Just to put the size of the U.S. treasury bailout into perspective, one can look at the cost of the war in Iraq. Paulson's plan will cost $700bn or $30bn per month over the next two years. This is nearly three times more than the monthly cost of the war in Iraq which costs 10bn per month to the U.S. tax payer. Currently, the United States federal government runs a deficit of $438bn, or 3 per cent of gross domestic product and the bailout costs could push the fiscal deficit next year to $1 trillion or 7% of GDP. (Other example is GS exposure and leverage.)
Global Macro Strategy. What is It? • A Global Macro approach to investing combines: • Macro Economic Indicators • Interest Rates, Current Account, Budget Deficit, etc. • Inter-Markets Analysis • Currencies, Stocks, Bonds, Commodities, etc. • Behavioral Finance • Speculative Positioning, Greed Vs Fear, Risk Appetite, etc.
Global Macro Indicators Interest Rates Many Currency Traders Only look at Central Bank Interest Rates. This is a Big Mistake! Particularly when we have a slowdown in the world economy. Overnight Index Swaps Helps You To Avoid Mistakes by Measuring Rate Expectations for 12 months Source: Bloomberg * Without proper risk management, a high degree of leverage can lead to large losses as well as gains.
Global Macro Indicators Inter-Markets Analysis Source: DailyFX Each financial markets gives you a different perspective of the overall economic environment. For instance, before the bankruptcy of the Bear Stearns and Lehman Brothers one could see that credit default swaps were already extremely high.
Global Macro Indicators Speculative Positioning The FXCM SSI is based on proprietary customer flow information and measures the positioning of thousands of retail traders. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. The SSI is a contrarian indicator. Source: Tradestation, FXCM More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market, the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.
Global Macro Indicators Retail Traders Positioning 10/23/2008 Source: FXCM The ratio of long to short positions in the EURUSD stands at -1.22 as nearly 55% of traders are short, according to the FXCM SSI which measures the positioning of thousands of retail traders. However, the higher the number of short orders in a bear market the more dangerous is to take additional short positions because many traders are leaving their stop losses just above the current price action. The SSI is a contrarian indicator and signals EUR/USD gains going forward.
Investment Themes For 2009 The Credit Crisis When will it end? Global Interest Rates Cut to prevent recession or hike to stop inflation? U.S. DollarHas it bottomed, or is the worst to come? The Commodity Boom Have oil prices peaked? China Immune from the global slowdown? Think again!
FORECAST for EUR/USD Source: Tradestation, FXCM In the short-term, we expect a wave of profit-taking to lead to a small rebound in the EUR/USD. Then, the euro is likely to resume its down trend against the dollar and depreciate to 1.16 before the end of 2009. Next year, we expect the Euro zone economy to fall into a severe recession and inflation pressure to ease, adding to speculation that the European Central Bank will cut rates further and faster than traders expect. On the other hand, the U.S. Federal Reserve is likely to start tightening in the second half of 2009. Lower interest rate differentials could make the euro less attractive to currency traders and the higher level of demand for U.S. treasuries could accelerate the losses in the EUR/USD.
FORECAST for USD/JPY Source: Tradestation We expect risk aversion to remain the predominant theme in the currency market and carry liquidation to continue going forward. The similarities between the recent credit crisis and the Asian crisis of 1998 are amazing and if history repeats itself again we may see the USD/JPY trading at 85 before the end of 2009.
FORECAST for AUD, NZD, CAD and Carry Source: Tradestation With the world economy slowing down is reasonable to think that the demand for commodities in will also begin to dry up. This will bring down inflation and possibly pressure the RBA, RBNZ and BoC to promote growth by bringing down the level of interest rates. In addition, lower interest rates combined with the recent spike in exchange rate volatility makes carry trade a very poor investment strategy from a risk adjusted perspective.
Thank You asousa@fxcm.com
