How Egypt and Libya saw risk being redefined

SPEND 10 years as a professional foreign currency trader, another four as a fixed income trader, then head up several global trading desks and you get a very close look at that rarest of forex animals: Speculatorus Supersuccessfulus.

“Those who make the greatest gains,” says Dean Popplewell, “are always the most silent.”

Popplewell himself is now very voluble. As chief currency strategist at forex platform OANDA, he’s one of the best-read bloggers.

And what the 43-year-old Irish-Canadian has to say, exclusively to City A.M. – about new rules for both managing risk and making a profit – is worth hushing-up for.

“Historically,” says Popplewell, “the US dollar was always the go-to currency. When a global crisis loomed, the market reaction was always a) you thought about it briefly, like, would it occur?, b) you bought the dollar, and c) you banked any opportunity profit.”

In just the last six weeks, the knee jerked entirely differently.

From the outbreak of unrest in Tunisia until 11 February, when Mubarak surrendered in Egypt, Popplewell followed what was happening on OANDA’s real-time, on-line order book.

What his screen revealed was that the market itself was rewriting the way it managed risk.

“The risk on, risk off strategies and perfect correlation – implying that, as one security moves, up or down, the other security will move in lockstep, in the same direction – has disappeared from the market,” he says. “Now it’s about safe haven plays, rate expectations and central bank policies.”

And, instead of running, lemming-like, for the greenback, traders headed for currencies they understood best, and trusted.

“Because of Europe’s investment in the Middle East,” says Popplewell, “it became the thing to revert to own-home currencies, especially sterling and the euro. But they ran for home first and only then started to look at the big picture.”

The Arab crisis should have been no different to any previous global upheaval. “In 1998, we had the Asian crisis,” says Popplewell. “But the markets did as they always did in those days and ordered plain vanilla, going straight into the US dollar.

“The same happened with September 11. Everyone could see every second on television, it was actually happening in the US. Again, everyone gravitated toward the US dollar.”

What changed things is the speed at which, not images, but information flows. “On the big picture today,” he adds, “there are so many more variables. But all the data, on, say, currency flows created by hedge funds is accessible. And because of the ease of trading, and its total transparency, individuals can invest and divest, hour by hour.”

What happened – is happening – shows how individuals, armed with up-to-the-second expert analysis, stayed on top of the fast-moving situation, switching an appetite for risk quickly back on.

“Egypt was seen as the pinnacle, and an appetite for risk returned when it became clear it was not in meltdown,” says Popplewell.

Libya has been more violent. “But,” stresses Popplewell. “the major concern was contagion. Would it engulf Saudi Arabia?”

As soon as the Saudis opened the oil taps again, forex speculators applied risk principles again. “The market was trying to get ahead of itself,” says Popplewell, “as always happens.”

What it exposed was a huge divergence between the European Central Bank (ECB) and the US Fed. “For 10 days,” says Popplewell, “the ECB rhetoric became hawkish. It feared a spike in oil prices would cause inflation. The Fed saw it as being of deflationary concern.”

With a ballooning deficit having already made it difficult to see the US as a safe haven, the real-time activity of forex traders, as Toronto-based Popplewell noted minute by minute, showed the market increasingly putting its belief in anything but the US dollar.

Nothing better defined that than what happened to the currency of his own country. “Because 70 per cent of Canada’s exports go to the US, the Canadian currency has, traditionally, been tied to that of its mighty neighbour, lumped together in North America,” he says.

“Now, while the world is watching the US dollar’s inability to attract the traditional geopolitical safe haven bid, our dollar has become a safe currency in its own right.

“The Canadian dollar will never trump the Swiss franc, but the rest of the world now holds it in high esteem. Suddenly, for strong financial and economic reasons of its own, the Canadian dollar, not US, is the one the world wants.”

But super-fast information dissemination also makes the “lemming trade”, as Popplewell describes it, even more likely to happen. “The important thing for any individual to understand is that they have to do the same due diligence on every trade, whether it be as a result of immense research or a snap, gut feeling decision.

“Forex today is the largest undefined asset, and has to be examined and valued just like fixed income and equities. Nowadays, you are not just investing in the movement of a currency. You are also investing in the FTSE or the Hang Seng, because of the interaction and impact they have upon each other.”

But what is the secret of winning silent bragging rights?

“What separates the amateur from the professional,” he says, “is that the inexperienced trader lets losses run far too long. Gets far too far under water. Yet they’re also far too ready to say ‘Oh, my God, I made a profit’ and cash in.

“The pro will cut his loss far quicker, but will ride a winning position, always asking, Can I squeeze more out of it? He will say ‘I’m right! But how right?’.

“But they never let you know how they’ve done. One thing you can guarantee, though: the bigger the silence, the bigger the gain.”