Q You are chairing a panel at City A.M.’s Active Trader Conference in June. Who will the session benefit and why?
A It will be useful for traders trying to navigate their way through what has become an increasing complex market, which is going through big changes. There’s a lot of volatility, but this brings opportunity. I’ll be directing the conversation so the audience doesn’t get the usual spiel, but actually goes home with some useful nuggets they can apply to their trading strategies: real information about the landscape, what it means, and what new strategies are out there to replace the old ones that now seem redundant.
Q What are the main challenges currently facing foreign exchange traders?
A Traditional strategies haven’t been working this year. The carry trade (when you borrow money in a lower yielding currency and invest it into a higher-yielding one) has been terrible, and is almost dead. Look at how difficult the dollar carry trade is, purely against a basket of G10 currencies.
And volatility in the forex markets has been turned on its head. Currencies that were traditionally volatile – like the Australian dollar and the New Zealand dollar – aren’t any longer. But these challenges present traders with opportunities, since the outlook is bearish for yen and sterling.
Q What role have central banks played in changing the way traders trade?
A Central banks of higher-yielding currencies are getting concerned about the strength of their currencies. We’ve seen it from the Australian dollar, the New Zealand dollar, the Canadian dollar, and some emerging market currencies. Central bankers are the kingmakers. In terms of looking at currency movements, yield is king – more so than economics. So there are lots of opportunities to trade yield differentials, which explains some of the euro’s resilience in the face of weak economic growth.
Q But currency movements often depart from the fundamentals. What should traders do?
A Don’t write off the fundamentals. Even if you are a technical trader, you’d be stupid not to be aware of what central bankers are doing. For example, how close is the Fed to easing-off from its third round of quantitative easing (QE)? Is the European Central going to cut rates soon? All this has an impact.
Q Which currency pairs look fundamentally weak?
A Many are talking about Japan, but we’re more neutral on the yen’s prospects. It’s seen a huge move, and we may start seeing a backlash against what the Bank of Japan is doing, and real concern about the strength of Asian currencies in particular.
For example the Thai baht is back to 1997 levels, and Thai Airways recently said it is concerned about the baht’s strength. This puts pressure on the Bank of Japan, and I think it’s not going to be given a free ride to allow its currency to depreciate. The yen may fall to ¥105 against the dollar over the next couple of quarters, but I don’t see it falling to ¥120 anytime soon.
Q And which currencies have a positive outlook?
A We like the Scandinavian currencies, although we remain a little wary. A lot has been said about the dollar, but we are much more neutral. Quantitative easing is with us for the long haul, especially if we see another dip in the US economy. A turn in the dollar is long overdue. The prospect of the Fed tightening policy has been completely overdone. Tapering off – reducing the scale of QE but continuing its asset purchase programme – is a possibility by the end of this year.
Q What are your expectations of incoming Bank of England governor Mark Carney?
A I think Carney supports fiscal tightening and austerity, which can work in conjunction with loose monetary policy. So it is likely that we may see more QE in the UK. More radical action may come in the medium term. But Carney has got to tread lightly, because there is a debate at the Bank of England on the usefulness of QE.
Q You recently wrote Forex: A simple approach to trading. What do you hope traders will learn from it?
A I wanted to show actionable ideas and strategies that will benefit every retail trader. It is aimed at people with a grasp of the basic trading concepts, but who want to elevate their trading to the next stage. I want to help people refine the way that they look at the market, and how they digest volumes of information. The retail trader has a life outside of trading, and they want to do other things. So I have kept the approach simple, manageable, and easy to digest.
Kathleen Brooks is research director, UK EMEA at FOREX.com, and author of Forex: A simple approach to trading. She will be chairing a discussion at this year’s City A.M. Active Trader conference on 21 June 2013 at The Grange Hotel, Tower Bridge, London E1 8GP. Early Bird Tickets are now available for just £45 from www.CityAMactivetrader.com