Changing the game plan in FX

Currency markets are in what can only be described as a state of flux at the moment. Leaving aside the yen, which has risen for the past seven consecutive sessions, we’ve seen the dominant trends of the past few weeks partially reversed (or at least stalled), making the bigger directional movements far harder to call. We see that in sterling, the Canadian dollar, the Aussie and the single currency to varying degrees. Beneath all of this, we see the dollar struggling as many have been forced to ditch the view of a dollar rising on the basis of divergent monetary policies. The dollar index is now 6% lower on the year to date, which was not in the game plan of longer-term investors. For sterling, the focus this week is less on the Brexit story and more on the domestic agenda, with inflation data released today and the Bank of England decision following on Thursday. For now at least, this is of secondary importance for the currency as compared to the EUR referendum in June, as expectations for a near-term change in policy are very low in either direction. Interest rate markets suggest around a 30% chance of an easing before the year-end, which is not a view widely expressed by commentators, but nevertheless is another factors that has been weighing on the currency of late.

Elsewhere, Brazil is catching the headlines as the political turmoil continues, edging towards the possible impeachment of President Rousseff. The currency, having been battered last year, continues to rally on the basis that the end is that much nearer for the currency period of political turmoil and stalemate. The real remains the strongest performing emerging market currency so far this year, but beneath the surface the fundamentals remain fairly ugly, with another year of negative growth forecast for this year after last year’s decline. So whilst promising, the political story can only drive up the currency so far before the ugly fundamentals start to kick in.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Pip" - The smallest increment in which a currency pair can move. It is usually the fourth decimal place of the quote currency in a pair. In the case of the Japanese yen (JPY), it is the second decimal place of the quote currency.
Pro Tip

Higher leverage --> Less funds required as margin / Lower leverage --> More funds required as margin

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