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Global Macro Trading
”Focus on the Big Picture And Ignore Everything Else”
Antonio Sousa
Chief Strategist For DailyFX
FXCM, New York City
Disclaimer
Trading foreign exchange on margin carries a high level of risk, and may not be
suitable for all investors. The high degree of leverage can work against you as well as
for you. Before deciding to trade foreign exchange you should carefully consider your
investment objectives, level of experience, and risk appetite. The possibility exists that
you could sustain a loss of some or all of your initial investment and therefore you
should not invest money that you cannot afford to lose. You should be aware of all the
risks associated with foreign exchange trading, and seek advice from an independent
financial advisor if you have any doubts.
The contents provided in this seminar are subject to change at any time without
notice. There is no guarantee that the systems, trading techniques, FX PowerCourse,
trading methods, indicators or other information presented at this seminar will result in
profits or not result in losses. The content is provided for informational purposes only
and is not intended as a trading recommendation.
Global Macro Trading
Imagine that you are looking at a perfect up trend in the AUD/JPY.
Now, assume the world economy is growing , commodities are rallying and higher yielding
currencies are outperforming currencies with low interest rates like the yen (2002-2006).
Would you buy this currency pair?
Global Macro Trading
“Focus on the Big Picture And Ignore Everything Else”
Any Technical Analysis
expert would recommend
you to buy currencies that
are in a strong up trend.
However, in this case that
would be a terrible
investment decision!
A Global Macro trader avoids this type of mistakes by ignoring short-term events like intraday trends
and news releases. Instead, a Global Macro Trader looks for big shifts in global economic trends,
usually caused by changes in interest rates, fiscal policy, current account, risk aversion and changes
in speculative positioning.
Global Macro Trading
The chart below is a real world example which shows that is difficult to find a perfect
technical analysis setup. In fact, even though the Australian dollar was in an up trend during
7 years, it took only 3 months for the AUD/JPY to lose more than 40 percent.
Global Macro View : The recent financial crisis is triggering an unprecedented carry
trade unwind and with the world economy slowing down is reasonable to think that
the demand for commodities will also begin to dry up which could make high yielding
currencies like the Australian dollar very vulnerable going forward.
The Recent Financial Crisis is a Big Global Macro Event
The credit storm that began in the United States is now affecting the entire world and the implications
are so serious that need to be accounted for in all of your investment decisions.
Performance of Stock Markets (last 12 months)
The big question is whether the bailout will impact the status of the Dollar as a world reserve currency?
Just to put the size of the U.S. treasury bailout into perspective, one can look at the cost of the war in Iraq.
Paulson's plan will cost $700bn or $30bn per month over the next two years. This is nearly three times more than
the monthly cost of the war in Iraq which costs 10bn per month to the U.S. tax payer. Currently, the United States
federal government runs a deficit of $438bn, or 3 per cent of gross domestic product and the bailout costs could
push the fiscal deficit next year to $1 trillion or 7% of GDP. (Other example is GS exposure and leverage.)
Global Macro Strategy. What is It?
A Global Macro approach to investing combines:
Macro Economic Indicators
Interest Rates, Current Account, Budget Deficit, etc.
Inter-Markets Analysis
Currencies, Stocks, Bonds, Commodities, etc.
Behavioral Finance
Speculative Positioning, Greed Vs Fear, Risk Appetite, etc.
Global Macro Indicators
Interest Rates
Many Currency Traders Only look at Central Bank Interest Rates.
This is a Big Mistake! Particularly when we have a slowdown in the world economy.
Overnight Index Swaps Helps You To Avoid Mistakes by Measuring Rate Expectations for 12 months
Source: Bloomberg
* Without proper risk management, a high degree of leverage can lead to large losses as well as gains.
Global Macro Indicators
Inter-Markets Analysis
Source: DailyFX
Each financial markets gives you a different perspective of the overall economic environment.
For instance, before the bankruptcy of the Bear Stearns and Lehman Brothers one could see that
credit default swaps were already extremely high.
Global Macro Indicators
Speculative Positioning
The FXCM SSI is based on proprietary customer flow information and measures the positioning of thousands of retail traders.
The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the
EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. The SSI is a contrarian indicator.
Source: Tradestation, FXCM
More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start
having adverse movements against their position, many tend to increase the size of their position with the purpose to average
down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull
market, the more dangerous is to take additional shorts because many of those traders who just entered the markets are also
leaving their protective stop losses just above the current price action.
Global Macro Indicators
Retail Traders Positioning
10/23/2008
Source: FXCM
The ratio of long to short positions in the EURUSD stands at -1.22 as nearly 55% of traders are short,
according to the FXCM SSI which measures the positioning of thousands of retail traders. However, the
higher the number of short orders in a bear market the more dangerous is to take additional short
positions because many traders are leaving their stop losses just above the current price action. The
SSI is a contrarian indicator and signals EUR/USD gains going forward.
Global Macro Forecasts for 2009
Investment Themes For 2009
The Credit Crisis
When will it end?
Global Interest Rates
Cut to prevent recession or hike to stop inflation?
U.S. Dollar
Has it bottomed, or is the worst to come?
The Commodity Boom
Have oil prices peaked?
China
Immune from the global slowdown? Think again!
FORECAST for EUR/USD
Source: Tradestation, FXCM
In the short-term, we expect a wave of profit-taking to lead to a small rebound in the EUR/USD. Then, the euro is
likely to resume its down trend against the dollar and depreciate to 1.16 before the end of 2009.
Next year, we expect the Euro zone economy to fall into a severe recession and inflation pressure to ease, adding
to speculation that the European Central Bank will cut rates further and faster than traders expect. On the other
hand, the U.S. Federal Reserve is likely to start tightening in the second half of 2009. Lower interest rate
differentials could make the euro less attractive to currency traders and the higher level of demand for U.S.
treasuries could accelerate the losses in the EUR/USD.
FORECAST for USD/JPY
Source: Tradestation
We expect risk aversion to remain the predominant theme in the currency
market and carry liquidation to continue going forward.
The similarities between the recent credit crisis and the Asian crisis of 1998
are amazing and if history repeats itself again we may see the USD/JPY
trading at 85 before the end of 2009.
FORECAST for AUD, NZD, CAD and Carry
Source: Tradestation
With the world economy slowing down is reasonable to think that the demand
for commodities in will also begin to dry up. This will bring down inflation and
possibly pressure the RBA, RBNZ and BoC to promote growth by bringing
down the level of interest rates.
In addition, lower interest rates combined with the recent spike in exchange
rate volatility makes carry trade a very poor investment strategy from a risk
adjusted perspective.
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Questions
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