Big changes in the currency markets are roiling all financial markets…and even greater volatility looms on the horizon as "struggling" countries decide to devalue their currencies... hoping to revive their economies... to become more competitive... to earn export revenues... to generate jobs. Currency devaluations (currency wars) are “beggar thy neighbour” policies…they are a sub-set of trade wars…and they can definitely become contagious.
If I had to limit my trading to just one market for the next few years, I’d chose the currency markets…that’s where the action is going to be.
Everyone knows that the Japanese Yen has fallen sharply against other currencies since mid-November…as the new Prime Minister, Mr. Abe, has pushed the Central Bank to “print” Yen in an attempt to stimulate the domestic economy… knowing full well that the “printing” would also cause the Yen to decline on the foreign exchange markets. But while the Yen has been falling the unemployment rate in Korea has been rising… how long will it take before the new Korean government decides to devalue their currency to regain market share lost the Japanese?
When countries “struggle” economically their governments may try to “stimulate” the economy with deficit spending… their central banks may try to stimulate the economy with “easy money” policies… but if that isn’t getting the job done then governments may decide to restrict imports and increase exports… using trade barriers… tariffs… currency devaluations… in an attempt to boost their domestic economy… to “create” jobs… and to get re-elected.
If global economies fall into a recession then “currency wars” (competitive devaluation) may become widespread…a “race to the bottom” as paper currencies compete with one another to become worth-less. But while getting your currency down may help your export industry and create domestic jobs, it’s a double-edged sword…the Japanese, for instance, shut down their nuclear plants after the tsunami in 2011, and now with the Yen down ~20% against the US Dollar they are paying a lot more for imported oil.
Here is Ambrose Evans-Pritchard’s take on the coming global trade war …with a reference to "The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead" by Michael Pettis.
It’s all about the relative values of different currencies. For instance, you might think that the US Dollar is losing its purchasing power…and that may be true…but in the world of currency trading the “least ugly” wins the beauty contest! The currency markets are driven by “Market Psychology” more than any other market. They tend to get more overvalued and more undervalued than other markets…and therefore make “V” shaped turns…trends in the currency markets can easily go on far longer than you think is possible or reasonable. The FX markets trade 24 hours a day with London, England as the global hub.
Speculative trade volumes far exceed commercial trade volumes in most currencies. Retail traders can easily access the FX markets via online spot trading platforms, ETFs and the futures and options markets. The leverage available can be dangerously high…my advice is to not use all the leverage available.
Call 604-664-2842 to talk with a futures broker about trading FX.