Currencies Investment ViewPoints |
10/06/2010 EUR/USD – the eye of the storm 23/04/2010 Volatility – the VIX factor 05/03/2010 Special FX – blockbuster times for global currencies 16/12/2009 'Tis the season to be ....sterling 20/10/2009 Drag on the dollar? Cause and effect 14/04/2009 Euro Weakness vs Sterling Strength |
10 June 2010 - EUR/USD – the eye of the storm
As tension and excitement builds in anticipation of the greatest show on earth in Africa over the next month, there is a different type of pressure continuing to build across Europe. This weeks Investment ViewPoint Comment takes a snapshot of the current economic landscape in Europe and while core currency markets have been relatively calm we consider whether we are merely in the eye of the storm with further volatile headwinds in the distance.
Macro economic background
This year Europe and in particular Greece’s fiscal deficit troubles and its plans to adopt austerity measures have been well documented with phrases such as ‘economic contagion’ and ‘sovereign debt’ now rolling off the tongue. Regular followers of Investment ViewPoint will recall how we commented on Greece’s debt problems in ‘Special FX – blockbuster times for global currencies’ commenting that Greece may have to bow to pressure from the EU and accept a rescue package in order to avoid a currency crisis in the Euro. Greece in the end relented and accepted support with Europe agreeing a package of €500 billion to stabilise the crisis. Greece has also had to endure strikes and protest from the Greek people unwilling to adopt some of the new fiscal measures required by the EU. This economic backdrop has weighed heavily on the Euro which has consistently fallen over the course of the year (see charts below). While there is a clear downward trend, EUR/USD has largely moved sideways for periods at a time, range trading for days as markets continue to look for signs of recovery or indeed further risk for the downtrend to continue.
On the horizon
Moving closer to the UK and Spain hit the headlines this week with ‘economic contagion’ potentially developing in the summer hot spot. With over 1 million public sector workers on strike at the moment, contributing to the 20% national unemployment rate it is clear Spain’s economic problems are nearing crisis levels should they fail to get their economy back on track. A collapse of Spain’s economy could be catastrophic for the EU. Market commentators suggest that as Spain’s debt is largely owned by foreign banks it means if they default then potentially deposits would not be paid to customers across Europe, not just in Spain. Just this month, Spanish bond yields have risen sharply reflecting this nervous sentiment across investors and markets alike with the 10 year government bond climbing to 4.66% on Monday. This rise causes concern given Spain is due to raise money to help pay for the €16.2 billion of debt that is set to mature on 30 July. Should Spain default on this payment, we could see a Greek style crisis rapidly develop in Europe’s 4th largest economy.
Targets and trends
With EUR/USD hardly moving this week it has allowed momentum and sentiment to unwind without necessarily impacting the overall downtrend that has dominated trading this year. Barclays Capital research analysts continue to stay bearish on EUR/USD focusing on 1.1435 as the next low lying target over the coming weeks and months, selling rallies in the meantime. With so much going on across Europe and the potential for further economic uncertainty coming out of Spain it will be interesting to see if this pressure continues to influence the Euro and indeed the output from research analysts at Barclays Capital.
If you would like to find out more about Barclays Capital research and how this can help hone your trading strategy, contact our dedicated BARXdirect: FX team on 0845 300 9050 who will be happy to help you. Alternatively, you can open a BARXdirect: FX account and gain access to daily fundamental and technical analysis from Barclays Capital, in order to support your trading endeavours. You can also keep track of currency movements by accessing our live streaming FX rates for your iPhone by clicking on the following link www.barxdirect.fxinside.net
Remember, Barclays Stockbrokers does not give advice. If you are in any doubt as to the suitability of investments mentioned in this Investment ViewPoint, please seek professional financial advice. Leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.
23 April 2010 - Volatility – the VIX factor
The VIX is an index that measures the price of implied volatility of 30-day S&P 500 index options. It is commonly known as the ‘fear index’ - the higher the index, the more volatility is generally anticipated in the market or, put another way, the greater the level of fear! The VIX is measured in percentage points, so for example, if the VIX is trading at 25 that equates to an implied volatility rate of 25% for 30-day S&P 500 options.
The chart below takes a look at the VIX over the last 5 years and perhaps illustrates why it is sometimes referred to as the ‘fear index’. Markets in general thrive on certainty. Where there is uncertainty there is generally volatility and where there is volatility, risk and fear come to the fore. Looking more closely at the chart you can see the VIX spiked to around 80 at the height of the global economic crisis and the Lehman Brothers collapse in September 2008. Since then global markets have largely calmed as governments introduced fiscal stimulus packages through quantitative easing and helped to restore liquidity and confidence to the system. As ‘normal’ conditions returned so the VIX measurement has gradually subsided.
If you look at the chart up to the end of 2007, and prior to the onset of the credit crunch and global economic crisis, the VIX generally traded within a range of 10-20 so today’s figure of around 16 indicates that we are largely back to pre-crisis levels. So are markets back to normal? Or is there still a bumpy road ahead of us? Of course we can not tell what the future will bring but what we do know is that markets move in cycles. So the question remains, when will volatility return? Here in the UK, markets continue to wait with bated breath on the outcome of the May 6 general election and the potentially damaging scenario of a hung parliament. With no clear winner and therefore no clear mandate for a government to drive the strategy to tackle the UK’s budget deficit, this could bring further unwanted uncertainty for markets and therefore potentially further volatility.
Emotion can be an important part of any client’s trading strategy. Knowing when to take a profit or cut your losses is often the hardest decision to make and quite often the ‘heart rules the head’. The recent economic downturn is testament to this as clients and markets alike lick their metaphorical wounds. Gulnur Muradoglu, Professor of Finance at Cass Business School, who specialises in behavioural finance, says “For asset prices, investors used past data to calculate the probability of positive, negative and extreme returns. The financial crisis has changed all that. Now ambiguity prevails rather than risk. Ambiguity is more difficult to deal with – it makes people freeze.” Utilising a range of indicators can often help investors reach the correct investment decision. Following the performance of the VIX is just one potentially helpful indicator. There are of course a number of steps that clients can use to manage their ‘fear’ of the unknown and help control their own trading destiny. For example using different order types such as take profit and stop loss orders or accessing complimentary market research on the BARXdirect suite of platforms can be considered helpful options to execute your trading strategy.
You can position your portfolio in a number of ways to take advantage of any return to volatility. If you are an experienced investor, and prepared to accept a high degree of risk of losses to your capital in exchange for the possibility of high returns, then the BARXdirect suite of trading platforms offer an attractive range of markets to choose from.
On BARXdirect: Equities you can trade UK equities and Covered Warrants allowing you a range of options to diversify your investment portfolio. On our BARXdirect: CFD and Financial Spread Trading platform you can take leveraged positions, both long and short, in a number of markets and underlying instruments including, equities, sectors, indices, FX and commodities such as oil and gold. Finally on our BARXdirect: FX platform clients enjoy some of the tightest spreads in the market at 0.9 pips on EUR/USD and 1.8 on GBP/USD. Did you know approximately $3 trillion is traded daily in global FX markets and is the largest and fastest moving markets in the world? To experience the real thing you can open a demo account with £50,000 virtual money or alternatively open a live FX account
Leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.
5 March 2010 - Special FX – blockbuster times for global currencies
As we approach the Oscars on Sunday, traders could be forgiven for thinking the last 18 months’ market conditions have come from a Hollywood studio! It really has been unprecedented times for global economies which have made for exciting times in currency trading.
With quantitative easing either stopping or slowing down in various economies around the world over the last few months, some commentators have suggested we may be in for a period of calm and stability in FX markets. However like any good movie there is always likely to be a twist in the story and with continued rumblings of discontent in the Eurozone, market volatility could start to heat up once again.
In February finance ministers from the European Union (EU) gave Greece an offer they couldn’t refuse by warning the Hellenic state to make significant budget cuts in order to remove any currency risk to the EU. Greece must show by March 16 that the government is on track to cut its gross domestic product budget deficit from 12.7% to 8.7% in 2010. And just this week we also observed the EU Commissioner for Economic and Monetary Affairs, Olli Rehn say “I am asking the Greek government to announce new measures in the coming days” suggesting all is not well in the land of myths and legends. Subsequent responses from the Greek Finance Minister George Papaconstantinou suggested “The government will do whatever it takes [to cut the deficit]” Independent views on the matter suggest we could finally hear the Greek government shouting ‘show me the money’ in true Jerry Maguire style as they finally bow to pressure to meet the needs of the EU.
This uncertainty has weighed heavily on the outlook of Eurozone nations who appear committed to helping Greece repay its debts mainly because if Greece defaults then this threatens to start a European debt crisis which would undermine the euro.
Across the water in Turkey we see continued unrest that is likely to impact the Turkish lira with the market continuing to keep a watchful eye on the investigation into the alleged military coup to topple the government. The lira has recently hit a nine-month low of 1.5560 against the US dollar and while currency traders aren’t quite saying “frankly my dear I don’t give a damn” its fair to suggest this uncertainty will continue for the foreseeable future meaning further volatility for US Dollar vs Turkish Lira (USDTRY).
May the force be with the renminbi
Looking to the Far East there isn’t any big trouble brewing in little China with the globes most populous nation apparently on course for another strong performance this year. Last year China was the third largest economy in the world behind the United States and Japan, but following respective performances in 2009 China looks set to roar and become the second largest economy in the world and finally overtake the land of the rising sun. China’s economy expanded by 8.7% compared to Japan’s annualised 4.6% in 2009 and with both countries figures now so close it looks likely this will be China’s year to take second spot. This growth is good news for emerging market currencies and Japanese Yen (JPY) crosses in particular. Market analysts continue to monitor whether the Chinese renminbi will be revalued against the US dollar this year and with Barclays Wealth Research anticipating the renminbi appreciating in value this year we could see a distinct halo effect coming into play in the surrounding emerging market economies and currencies as they benefit from the increased trade flow that would likely materialise.
Looking closer to home, sterling continues to take a pounding and give cause for concern. While markets work to avoid getting hung up on the impact of this years general election and the uncertainty of managing the UK’s fiscal deficit we have observed some interesting client trends recently on the BARXdirect: FX platform. A number of FX clients in recent weeks have suggested that GBP/USD had bottomed out and would rebound from 1.52-1.53 level; however sterling has fallen further to below 1.49, leaving traders pondering their next move in cable. So can the politicians provide some certainty on how they will manage the UK’s recovery? And can sterling recover, put in an award winning performance and reverse the downward trend against the US Dollar and currency king of the world?
Whatever your view on currency markets, why not test them by registering quickly for our BARXdirect: FX demo account. You can trade with £50,000 virtual money allowing you to hone your trading strategy and experience one of the fastest and most exciting markets in the world. And if you enjoy the adrenaline of trading risk free under live market conditions then why not try the real thing? If you have experience and knowledge to trade for real, then why not open a BARXdirect: FX live account which offers online trading on a global time-zone.
FX trading is a leveraged product which means you are required to deposit a fraction of the overall value of the trade. However, losses are also magnified and so FX should only be used by experienced investors who are comfortable with the risks associated
16 December 2009 ‘Tis the season to be …..sterling
One week on from the Pre-Budget Report (PBR), we look at how sterling has reacted, and whether the threat to the UK’s AAA credit rating has had an impact on the outlook for 2010.
Last week’s PBR was billed as the most important for many years. With the budget deficit growing more than ever, could the UK’s AAA credit rating come under threat?
Alistair Darling predicted modest growth for the UK’s economy next year (1%-1.5%) before reaching 3.5% in 2011/12, but had to admit that the recession had been deeper than he had predicted in last year’s budget.
The forecast for Government borrowing increased by £3billion to £178 billion, and the budget deficit is close to 12% of Gross Domestic Product (GDP). Borrowing is predicted to fall from its current rate to 4.4% in 2014/15. Without a plan to ease the deficit, the UK could lose its AAA rating. Last week, the pound hit a near 2-month low against the dollar, below 1.6175, amid concerns ahead of the PBR. It rallied slightly following the confirmation that there would be no windfall tax on bank profits, but then continued to fall.
And as the Bank of England held interest rates at 0.5%, with no change to plans for quantitative easing, it can be suggested sterling’s struggle is set to continue for the foreseeable future. So what opportunities does this bring for investors in the season of perpetual hope? If investors hold the view that sterling can still bounce back, even in the short term or alternatively hold the view that the ongoing weakness in the UK economy is set to continue what can investors do about it?
For more experienced investors, there are a number of ways to get exposure to sterling from the BARXdirect suite of products including FX, CFDs, FSTs and Covered Warrants. In particular the BARXdirect: FX product has seen record trading volumes in recent months as investors continue to speculate on currency fluctuations including GBP/USD and EUR/USD.
This interest looks set to continue into 2010 as various economies emerge from recession at different times and indeed at different rates which is likely to generate further volatility. Some European countries including Euro zone heavyweights such as France and Germany are already well on their way to returning to growth, while the US has only recently emerged from their longest recession since the Great Depression. The UK economy while still mired in recession appears to be on course to return to growth in early 2010.
These different stages of economic recovery mean we are seeing shifting patterns in key indicators such as unemployment figures, inflation projections, interest rates and the use of Quantitative Easing (QE) programmes. All these factors combine to cause fluctuations in currency markets which are leading to exciting trading conditions on FX markets.
Always bear in mind though that these investments can fall as well as rise in value and with FX, CFD and FST products you can lose more than your initial deposit or margin payment. The investments are not suitable for everyone; if you are in doubt about their suitability for you, you should seek independent advice.
If you are an experienced investor and you are prepared to accept greater risks in exchange for higher potential returns, choose BARXdirect: FX.
20 October 2009 Drag on the dollar? Cause and effect
On 15 October the dollar fell to its lowest value in more than a year against 14 of its 16 major counterparts. Is US fiscal policy likely to have lasting drag on the dollar and impact on the price of gold?
The Dollar Index, which is used to track greenback against the currencies of six major U.S. trading partners, sank 0.4 percent to 75.239, the lowest since August 2008 (see figure 1). Closer to home, the outlook for the dollar vs. sterling makes for interesting reading with Barclays Capital suggesting that a pound could be worth over $1.80* in six months time.
Figure 1. USD Index performance 2009
USD index measures the performance of the US Dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK
So why does the dollar continue to drag?
One school of thought suggests that the route cause is how the Fed is handling the US economic recovery and its fiscal policy.
On 16 October the Federal Reserve reported a second consecutive monthly rise in U.S. industrial output, estimating that, over the past two months, it will have increased by 1%.
Despite this improvement in growth, the Fed has made clear that it has no intention to change its current fiscal policy. Firstly, it does not intend to increase interest rates anytime soon and secondly, it has intimated that it will continue to increase liquidity into the market.
Minutes from the Feds September policy meeting published on 15 October showed that policy makers were, last month, open to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program. By encouraging the purchase of more mortgage backed securities in addition to an expected $200bn injection from other mortgage backed securities as they mature in the coming months, liquidity in the US will not be tightening anytime soon.
All of this shows a preference for the US to “get its house in order” perhaps at the expense of the value of the dollar against other currencies.
So if this is the cause, what are the effects?
Central governments around the world have already reacted by remarking that gold may become the reserve currency of choice over the dollar as its value drops compared to other safe havens. If the value of the dollar drops further there may be a reverse effect on the price of gold.
If you are an experienced investor and have a view on how the dollar will play out over the coming months our foreign exchange platform, BARXdirect: FX allows you to speculate on the movement of the world’s currencies and offers some of the tightest spreads in the market direct from Barclays Capital as well as daily access to their institutional-level research. Remember that leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.
>> Give FX trading a go on our BARXdirect: FX simulator complete with real time pricing and live streaming news.
For a more cautious investment choice right now, investors would be wise to consider why they might consider investing in gold and for how long. If gold is still of interest then read our latest Investment ViewPoint: Comment ‘Gold’s lustre returns’ for more detailed insight into the economics of the commodity and how to get investment exposure to it.
* Forecast as at 1st October
14 April 2009 - Euro weakness v Sterling strength
Although the Euro has recently weakened against Sterling, recent research from Barclays Wealth suggests that the Euro is still overvalued on a trade-weighted basis and suggests there may be potential for a prolonged move lower.
With EUR/GBP currently trading around the 0.9000 level (90 pence buys 1 Euro) versus a high of just below 0.9500 last month, it appears that concerns about European banks’ exposure to the dire emerging European economies are starting to weigh on the Euro. And it seems that the prospects for Sterling generally may be improving. Relative to its long-run fair value, Sterling is currently undervalued by approximately 21%. In the meantime, the Bank of England continues to implement quantitative easing which should have a positive effect on the UK’s growth and inflation prospects. These ideas and themes, and also the fundamental macroeconomic stance for the next quarter and beyond, are discussed in detail in the latest edition of Signpost from Barclays Wealth. This a research view and the markets may go the other way.
If you are an experienced investor and have your own view on these and other major currencies, you have the opportunity to access the world’s most liquid market, the foreign exchange market, via BARXdirect: FX from Barclays Stockbrokers. Here you will find all the research, news, analysis and technical trading tools to help you navigate your way around the global foreign exchange markets. Leveraged foreign exchange trading carries a high level of risk to your capital and you should only deal with money you can afford to lose.
Login to the Research Centre to read the latest edition of Signpost from Barclays Wealth
19 January 2009 - Sterling weakness v Dollar strength
A lot of economic data out this week with Q4 2008 UK GDP figures due to be published on Friday. With some analysts suggesting a 1.2% quarter on quarter contraction for the UK economy it suggests Sterling could weaken further as the UK economy is officially regarded as in recession.
Conversely, the US dollar has strengthened in recent weeks as investors look to ‘safer’ currencies and reduce their exposure to emerging markets. This seesaw approach is likely to continue through 2009 and while generally speaking it bodes for tougher economic times for consumers it allows investors and traders alike to speculate from these fluctuations in currency demand. BARXdirect: FX allows clients to speculate on the movement of currencies and also offers the benefits of institutional level research to help clients hone their trading strategies.
Remember that FX dealing is not for everyone and you can lose money.
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