TECHNICAL A NA LYS I SFOREX FLAWS

badly

global liquidity

FED DECISIONCONSEQUENCES

deteriorates

USDFORECAST

END OF YEAR VOLATILITYTRADING

CFTC FXREGULATION

ABENOMICS 2.0

MANAGED FX &TRADING SYSTEMS

OCTOBER - DECEMBER 2015

TRADER MAGAZINE

WHAT IS HAPPENING TO US DOLLAR LIQUIDITY SERIOUS MACRO TRENDS DEVELOPING

FXCONTENTs

GLOBAL LIQUIDITY IS DETERIORATING BADLYDiscusses what is happening to US Dollar liquidity and the cost of borrowing in Dollars

50

The Dollar Blueprint Remains Bullish. Long-term Trend Remains Higher39

07 EDITOR’S NOTE

FUNDAMENTAL ANALYSIS

31 Trading GBP: What to expect in Q4?

19 New Zealand Dollar: Will the RBNZ close the interest rate gap?

MONETARY POLICIES

17 The Future of Central Bank Monetary Policy: Analyses t he consequences of Fed’s September decision

74 Conventional monetary policy has failed. Time for the Nuclear Option

TRAINING

21 Ask The Coach: ke y points to accelerate your learning process

AUTOMATED TRADING

64 The Seven Deadly Sins of Automated Trading: what to avoid to save time and build a sound trading system

42 Interview with Alex Nekritin: on Managed Forex and how to choose a trading system

TRADING STRATEGY

11 How Experts are Profiting on Historical Volatility, Now Through December: Shows how to profit from the fourth quarter’s large trading ranges, coupled with 2015’s increase in volatility

68 Trend following. One more step to trading success: Learn a strategy to identify the formation of a new trend and get in early

79 Your Guide to Letting Your Profits Run: simple steps to keep losses to a minimum and let profits run

TECHNICAL ANALYSIS

24 Interview with Jim Martens: Fresh insights from Elliott Wave International’s Senior Currency Strategist

35 Flaws in Trading with Classical Technical Analysis: highlights some technical analysis flaws when applied to Forex and how to trade price action reversals

MARKET REGULATION54 A Brief Survey of CFTC Regulation

of Select FX Products

TRADING PSYCHOLOGY

81 Consistency is the Real Holy Grail of Trading: how to build an attitude of discipline and control to reach your trading goals

BOOK REVIEW

78 Systematic Trading by Robert Carver

TECHNICAL REPORTS

85 Trends and Targets:USD Majors, Major CrossesEmerging & Asian Markets

85 Featured Markets: AUD/USD, EUR/NOK, EUR/ZAR, USD/THB

89 CONFERENCES & SEMINARS

INTERNATIONAL DATA

90 FX Spot Monitor91 Central Bank Rates92 Economic Data - FX Poll93 Markets View

94 ECONOMIC CALENDAR

USD FORECAST 48ABENOMICS 2.0What are the goals of Japan’s plan aimed at boosting potential growth and how it can affect the Yen

FX TRADER MAGAZINE July - September 3

MARKET WATCHFX

Global Liquidity is Deteriorating BadlySerious Macro Trends Developing

It is the market that makes the news, not the news making the market. Over the long term, markets are linked to macro fundamentals but these macro trends are generally slow moving, and rarely get reported on. Often times, the big macro trends are misunderstood by the consensus because they are either not widely reported on, or are difficult to spot in real time.

As discretionary macro traders, we are extremely interested in short-term market moves, as this is what will drive our monthly profit and loss. However, to try and position for big macro trends, we have to understand big macro drivers. Since Bretton Woods when the US Dollar became the global reserve currency, macro drivers do not come bigger than the US Dollar. To help understand

changes in economic growth and financial markets, we have to try and understand what is happening to US Dollar liquidity and the cost of borrowing in Dollars.

What we discuss below is purposefully meant to be simplistic and does not go into the minutiae of global monetary trends. What we want to illustrate is that global liquidity is tightening now

by Stewart Richardson

50 FX TRADER MAGAZINE October - December 2015

at a time when traditional assets such as equities and bonds are extremely expensive. Furthermore, financial markets have entered a period of greater volatility, global economic growth is weakening, and the last thing that is needed right now is a liquidity tightening exacerbated by higher interest rates in the US, especially if that makes the US Dollar even stronger than it has been.

First, we present a chart (see Chart 1) put together by Julian Brigden of MI2 Partners (for those interested, we believe Julian is one of the premier global macro thinkers around today, and his research is a must read) which illustrates the historical fact that when the Dollar has been too strong, bad things happen.

As can be seen, the crises that occur because the US Dollar has been too strong are usually most evident in Emerging Markets (EM). The Dollar is the global reserve currency and is used to price globally traded goods. It is also very often used as a source

of cheap borrowing when times are good therefore a strong Dollar simply increases economic and financial costs. When the costs have become too high, a crisis somewhere in the EM world has resulted.

We would also point out that as the global economy and financial markets become more interlinked, a strong Dollar will eventually affect the US economy and likely US markets. We have a whole raft of US companies blaming a strong Dollar for missing earnings forecasts, and economists

have been very quick to blame the strong Dollar as one of the reasons for US economic growth falling short of expectations in recent quarters.

Chart 2 illustrates the relationship between the US Current Account and Global GDP, and asserts that Fed QE helped bridge a large gap post the 2008 Global Financial Crisis.

The relationship between Global GDP and the US current account is as follows. Because so much global trade and financing of trade is done in US Dollars, the World needs an ever increasing supply of Dollars to grow. Prior to the financial crisis, the US supplied these Dollars via their current account being in deficit. Generally speaking, this worked pretty well, except when the supply of Dollars was not enough (usually because of tighter US monetary policy and/or a strong Dollar).

However, something structurally changed in 2010. As expected, the US current account deficit narrowed

Chart 1: when the Dollar has been too strong, bad things happen Source: MI2 Partners

US Current Account vs. Global GDP Source: MI2 Partners

FXMARKET WATCH

FX TRADER MAGAZINE October - December 51