FxPro Forex Analysis: Dollar resilience after weaker GDP

US GDP grew at 0.1% annualised in the Q1 advance release, lower than the expected 1.2%. Note that the ADP release was a touch firmed than expected at 220k, with revisions also positive. This, together with the fact that data has proven to be better since the weak first quarter, has limited the negative dollar reaction, with cable only 20 pips firmer on the release, USDJPY 25 pips lower to 102.30. EUR is up to intra-day high at 1.3860.


FxPro Forex Analysis: Euro pops higher after inflation

The single currency is up 30 pips after the flash CPI estimate. The headline came in at 0.7% vs. an initial expectation of 0.8%. Note that softer German numbers yesterday had served to push down estimates, so in essence this should have been expected. The reaction of the currency reflects the degree to which markets are focusing on deflationary risks at this point in time, with short-covering helping push EURUSD back above the 1.38 level. We're also seeing overnight rates remain on the high side, even after the injection of liquidity from the ECB this week and this is also serving to offer underlying short-term support for the euro. In terms of ECB policy, a policy response is not assured at the May meeting. Even though the ECB has moved to more openly discuss alternative policy options available to them, it's not clear that we are at the point where they are going to be delivered. It's also not clear that further easing, in whatever form, would be substantially negative for the euro. As ECB's Noyer acknowledged yesterday, capital flows are causing the stronger euro, not deflation and there is a fair degree of truth in that statement.


FxPro Forex Analysis: Competing euro forces

The last trading day for April and there is plenty for FX markets to be watching. Early on, eyes are on Eurozone inflation data, which could well come in softer than initially expected after the weaker German numbers yesterday. Some see the number as making or breaking whether the ECB acts at next month’s policy meeting. The initial expectation was for a move higher to 0.8% (from previous reading of 0.5%), but there is decent chance that reading will not jump this far after the softer than expected German numbers yesterday. The other dynamic in the background has been rising short-term money market rates, which should start to reverse after yesterday’s addition of liquidity via the ECB’s weekly liquidity operations. So short-term the underlying dynamics should be for a softer euro, but this may not follow through vs some of the cross rates given that the structural issues that have underlined euro strength, principally the strong current account position. Looking beyond the single currency, the release of Q1 GDP in the US will catch the attention ahead of the Fed meeting this evening. Of course, a weaker reading is widely expected given the weather related distortions seen in Q1. Unless there are major surprises on this, the Fed is likely to continue its steady taper path this evening with a further USD 10 bln shaving of the pace of asset purchases. No news conference this time around, so that reduces the risk of verbal bombs from the new Fed Chair, but as always watch out for the statement, where subtle steers could well be given. Overall, this being month end, the risks are for some choppy trading, with seasonal suggesting stronger dollar through May.

Denis Sukhotin

Game Over

  It has been over a decade since foreign exchange showed the first signs of gaining wider attention as an asset class in its own right. Even though this change in attitudes coincides roughly with the rapid growth of the online forex industry, I think the connection between the two are incidental, both having taken place amidst far greater changes that have fundamentally altered our economic horizons. A number of contributing factors; economic, technological and cultural, have played a huge hand in currencies transitioning from a mere medium of exchange to an increasingly attractive asset class. The past few decades have seen the rise of a truly global economy, as well as the erosion of national boundaries due to the widespread adoption of information technologies. These technologies have made good on the promise of connecting us irrespective of geographic or cultural distance. It’s also important to keep in mind that all this has only really been possible since the official end of the Bretton Woods Agreement in 1973, which in many ways marked the beginning of globalisation. Untethering the world’s currencies from the US dollar and allowing them to float freely was the one of the first steps toward the highly liquid, highly efficient global forex market we have today, whose present infrastructure depends on information technology. The cultural changes that globalisation has brought with it (as the economic and technological pieces of this puzzle have fallen into place) can be thought of as the third prong of this process. These factors are inseparable; they are interrelated and highly symbiotic. One of the consequences of globalisation has been that FX is now an unavoidable part of how we do business. Whether this involves possessing sufficient foreign exchange reserves to settle invoices for imports, to adequately hedge against rising prices and market volatility, or to repatriate funds at the correct times; FX, now more than ever, is the key to maintaining a competitive edge for many businesses. In addition to this, the past few decades have seen the rise of an ever more global investment landscape. Investors seeking further diversity in their portfolios have achieved this this by investing further afield (a process no-doubt aided by the increased availability of timely, high quality information). Investments such as these require foreign exchange transactions and this requirement necessitates the development of strategies. As exchange rates and currency fluctuations have figured more heavily in the calculations of investors we have also seen the development of increasingly complex FX derivatives. The above examples cast FX in something of a secondary role, an unavoidable part of global commerce. However, the first decade of the new Millennium saw this balance shifting as a number of circumstances converged to make traditional asset classes far less attractive to investors. The bursting of the Dotcom bubble in 1999-2001 had the effect of wiping-out a great deal of the tech-related growth that had taken place in the mid-to-late-1990s. The stock market crash of 2000-2002 removed a further $5 trillion from the equity markets. This period also coincided with the September 11 attacks on New York’s Twin Towers in 2001, and of course we are still recovering from the financial crisis at the tail end of that decade. Notwithstanding the buoyant effects that quantitative easing has had on the equity markets since the 2008 crisis, the 2000s have largely been characterised by the underperformance of traditional assets, and non-traditional asset classes such as FX becoming more attractive to investors seeking alpha. All of the above, as well as the introduction of the Euro in 1999, which when paired with the US dollar rapidly became the most tradable financial instrument the world had ever seen, have contributed to the FX market’s daily turnover going from just over half a trillion dollars in 1989 to $5.4 trillion in April of 2013. This growth is as clear a representation of the forward march of globalisation as any. Retail FX, being in some ways a microcosm of the broader FX market, has exhibited similar patterns of growth and has been dependent on the same underlying conditions. The same economic, technological and cultural developments noted above have been the prime movers behind the rapid growth of our own industry. We have seen a nascent retail sector which was costly to enter, illiquid, latency-ridden, and stacked the odds significantly in the broker’s favour; evolve into an affordable, democratic, highly liquid and transparent market. What took over a hundred years of development in the case of the equities markets, took the FX market around 40 years, and has been achieved by retail FX in about a decade. Innovations such as algorithmic trading, born out of the interests of high finance, have rapidly been made available to the retail space, helping broaden the options of individual traders and increase the volumes of brokers. Recently the copy-trading phenomenon has brought countless new participants to a market that would otherwise have been difficult for many of them to enter. The fact, however, remains that forex brokerages are businesses with bottom lines, and so our industry is always going to have to contend with certain offerings that create profits in the short term, only to damage the reputation of the industry in the longer term. We have been outspoken about the use of bonuses to elicit deposits, and regard such promotions as fundamentally at odds with the direction the FX industry has been moving in. It is counterproductive for retail FX to be using models developed by the online gambling industry because any association with “the house” is damaging to an industry that has otherwise worked hard and invested heavily to make itself as transparent as possible. Recently EU regulators, including CySEC and the FCA, have moved to clarify their positions on the use of bonuses. While not openly condemning their use, the circulars released indicate that the way they are presently being marketed contravene certain EU directives. We feel the same way about certain products being offered in the space. Binary options, for instance, have taken the world of online trading by storm over the past few of years, and have effectively capitalised on the appetite for trading among individuals not prepared for the intricacies of forex. The adoption of binary options by many retail FX brokers can be seen as an extension of the use of bonuses, in that it’s a trend that has gained traction because it can be wildly profitable for brokers, but one that harms the industry as a whole because it is far closer to gambling than it is to trading. The reason for this is that binary options on gold or Apple stock, or EUR/USD are perfectly interchangeable with binary options on tennis rankings, or album chart positions. No need for orders to leave a broker’s books, no need for liquidity providers, no need, in fact, for anything other than risk analysts seeing to it that the broker takes the lion’s share of the spoils every time. At FxPro we have eschewed developments that we regard as gimmicks. Our goal has been to only adopt technologies and fund the development of products that we feel add genuine value to our traders. Our latest platform is a perfect example of this in action. Desiring to make the FX market more accessible without going against our no conflicts of interests business model, we looked to the world of asset management for inspiration. The idea was to take the benefits of copy trading and algorithmic trading and unite them with asset management, a sphere in which the results do all the talking. In this way prospective clients without the ability to trade manually, or the knowledge to implement algorithmic trading solutions on their own, can still have access to FX in a fair and transparent way. By dividing the labour between algorithmic strategy providers and investors, we devised a model in which all parties stand to gain without any conflicts of interests between them. The developers of strategies earn commissions, investors have access to these proven strategies in an environment that filters-out all but the very best, and FxPro earns commissions in return for offering its trading infrastructure and liquidity. We have also learned a great deal from using combinations of algorithmic and discretionary trading. While models allow for the removal of emotion, and offer the ability to formalise trading styles and attitudes to particular markets, no model is ever complete in and of itself. Confusing the map with the territory is likely to leave you with problems of over-fitting which can nullify the benefits of algorithmic trading. The beauty of the SuperTrader platform is that our analysts know the strategies we offer so well, they have been involved in the lengthy approval process that each has had to undergo. Even if leaders have a proven track record we expect them to demonstrate a deep understanding of the strategies they are attempting to have approved. Each leader’s individual process is highly important to us. For this reason our analysts are familiar with the thinking behind all of our listed strategies, how they have behaved in back and forward testing situations, as well as in a range of possible scenarios with Monte Carlo simulations. This gives our guys a pretty thorough understanding of the strengths and weaknesses of each strategy, as well as which market situations have proven to be problematic and gotten the better of certain strategies in the past. Our stringent approval procedure, on-going monitoring and guiding human hand means that our strategies tend to perform better than when left to their own devices. This is why FxPro SuperTrader is an improvement on both copy trading and algorithmic trading, which is the kind of evolution I am advocating here rather than jumping on bandwagons for temporary profits. I believe that platforms such as SuperTrader will be a mainstay in the forex industry in years to come. They allow us as an industry to make innovative and marketable products out of the expertise we have amassed and the technologies that we have available to us. They hold the promise to increase retail volumes by attracting both traditional and non-traditional investors to foreign exchange, as well as traders. Ultimately the onus is on us to provide value for our clients and make the case for online forex. Going forward all offerings that run counter to this end should be seen as a detriment.            


FxPro Forex Analysis: Sterling fails at multi-year highs following soft GDP

Ahead of the UK GDP figure release this morning sterling was testing its multi-year highs around the 1.6850 level but the moment the data came out those gains were swiftly eroded. We are still yet to have seen the near-term up trend break down as GBPUSD currently sits at 1.6800 at the time of writing, but following this morning's data release the upside momentum looks like it could be more of a challenge.


FxPro Forex Analysis: Output gaps

We enter the penultimate trading day of the month, with plenty of data to catch the attention of FX markets. Early on, there are indications on German inflation coming through from 08:00 GMT ahead of the preliminary data this afternoon. Thereafter with have UK GDP data at 08:30 GMT. In contrast to the dip in US output in Q1 (due tomorrow), UK output is seen rising 0.9%, following 0.7% in the previous quarter. Sterling has already been on the firm side over the past week, pushing just above 1.6850 with resistance seen at 1.6878 ahead of the 1.70 level. The Bank of England has been keen to extol the virtues of forward guidance and assuring markets that rates are not set to rise anytime soon. On a strong number, then a break of this aforementioned resistance level could well set up cable for a push to 1.70, not seen since August 2009 and then only briefly. Generally, the dollar was on the softer side through yesterday, with this cautious tone likely to hold into the output data tomorrow. Month end brings the usual risk of increased volatility as institutional investors re-balance hedges and weightings. Thereafter, the jobs data on Friday is likely to determine the early tone to the dollar in May, which as we mentioned yesterday, has traditionally been a strong month for the dollar in recent years.


FxPro Forex Analysis: Dollar selling for now

We are seeing some dollar selling against both the euro and sterling ahead of what should be a week of greater volatility vs. that which we’ve seen before. Month end flows are likely to see increased institutional trading going into mid-week. Thereafter, we have inflation data in the Eurozone, together with labour market data in the US at the end of the week. In the background, we are still keeping a wary eye on events in Ukraine, where tensions remain high. The dollar itself it trading 0.7% below the average of the year to date, so after the gyrations being seen so far this year, there remains an underlying belief that the dollar still has scope to recover as the US recovery gains its poise. In recent years it’s worth noting that May has proved to be a strong positive for the dollar, averaging 3.9% (dollar index) looking back over the past four years. For today, the data agenda is pretty light, but as the early price action has shown, flows going into month end are more likely to dominate the price action. The confirmation of Pfizer’s interest for UK based AstraZeneca is also behind the initial dollar selling against Europe, but as always, the timing, structure and uncertainty behind the flows of money for the bid leave scope for future volatility depending how the deal progresses.


Weekly Look Ahead 28th Apr – 2nd May


FxPro Forex Analysis: A reluctant euro

The notable mover in comparative terms yesterday was the single currency, as the ECB President once again laid out the options facing the ECB should deflationary forces continue to materialise. Whilst he said that the stronger currency was increasingly important for policy, the price action on the euro suggest that the market is not yet convinced of the potential for action next month. But there are also legitimate concerns that whatever measures the ECB announce may not have a material (negative) impact on the currency. The ECB meeting is just under two weeks’ time, but given the expectations that the ECB has created, it is going to be a long wait and the single currency is likely to get increasingly edgy running into it. The over-reaching focus today is with Ukraine, given that tensions remain high and there are more talks scheduled between international leaders today. This is likely to keep market cautious, something which has already been notable in Asian stocks overnight. We’ve seen inflation data in Japan come in slightly weaker than expected and this, combined with the cautious international backdrop, is limiting gains on USDJPY. Also worth noting is the release of UK retail sales data, where a fall month on month fall is expected after the strong rise of February. Sterling retains a bullish undertone, having been the only currency to outperform the US dollar over the past week. Elsewhere, the Kiwi and Aussie have under performed, with the Aussie failing to push back above the 0.93 after the release of weaker CPI data earlier in the week. Note that USDCNY has moved above 6.25 overnight, continuing the near relentless CNY depreciation seen over the past near 3 weeks.