SIX months ago, it seemed that the worst of the global crisis was over. The markets had calmed down, the economic recovery appeared to be firmly on track and traders seemed to have regained their risk appetite. But just as we thought things were on the mend, a sovereign debt crisis in the Eurozone coupled with renewed concerns about ballooning fiscal deficits elsewhere sent markets back into a frenzy. Investors retrenched and equity markets slumped as ratings agencies warned about government defaults.
This upheaval has been evident in the volatile, fast-moving currency markets, which are driven almost exclusively by news flow and reflect the broad themes of the global economy. To get a better idea of what’s driving foreign exchange in the post-crunch world, City A.M. asked Boris Schlossberg, director of currency research at retail FX-provider GFT.
The 46-year-old Schlossberg, who is based in?New York but regularly visits his firm’s Canary Wharf office, believes there are some key trends underlying the world’s biggest financial market. Given the size of the US fiscal deficit – expected to be at 10.6 per cent of GDP in 2010 – and the budgetary troubles plaguing states such as California and Michigan, could this derail the greenback’s recent rally? Schlossberg – who began his career at the legendary Wall Street firm Drexel Burnham Lambert – says that “for the time being all systems are go for the dollar” – it is benefiting from its safe haven status, the fiscal turmoil in Club Med countries and the fact that investors are anticipating relatively faster growth in the US than in the Eurozone.
While traders have cottoned on to the euro’s woes, Schlossberg stresses that the US could be vulnerable to Europe’s fiscal troubles, which would be dangerous for the dollar, an outcome which the markets have not priced in properly. “They could easily make their way over the Atlantic in the sense that investors begin to balk at the amount of deficit that needs financing this year.” A poorly covered Treasury auction would be all that is needed for the same concerns to flare up in the US.
Schlossberg predicts that the greenback will stay strong in the first half of this year, but by the second half, it will become more vulnerable to all of these forces. The mid-term elections in the US are also likely to be significant for the currency market, he adds. “If we get a shift back to Republican control of the House or the Senate, then that would be monumental, it would create an even greater sense of stalemate within US policy and weaken the Obama administration further.”
The year ahead will be characterised by range-bound, highly volatile markets as the overarching recovery strategy – a return to riskier assets is no longer in play. “2010 is going to be when all those stimulus programmes start to become a very serious problem for the G10 countries. This is going to temper a lot of risk flows this year.” Chinese tightening has been a major cause of risk aversion so far this year and the expectation is that Beijing will continue to put the brakes on policy. So what is the likely impact on the markets? Schlossberg says: “The knee-jerk reaction has been that whenever China tightens, sell the Australian dollar. It is a proxy for Chinese growth in the region and if you are still a growth bull in 2010 – and that is a big if – then buying the Aussie still represents the best trade in that direction.”
“There is a school of thought that says that China is a just a mass of bubbles which will all come crashing down. This is a legitimate risk and the Aussie then becomes the ultimate sell.”
There are many drivers of the FX markets and keeping on top of them is a hard task – $3.2 trillion worth of foreign exchange is traded daily and markets are open 24 hours a day from Monday morning in Asia to Friday night in the US. Schlossberg often works European time, even though he is based in America. The global nature of the market, means traders also need to see the big picture and take a view on the global themes.
One of the keys to success in FX, says Schlossberg, is to have a knowledge of the global arts, such as history, politics, culture and economics. The size of the market means it is driven almost exclusively by news flow, so well-informed retail investors – many these days are as knowledgeable as professional traders – benefit from an increasingly level playing field.
“Foreign exchange is the most flexible speculative instrument at the moment. You can trade it 24 hours a day, five days a week at very high leverage and without any of the negatives of options, which have time premium,” Schlossberg says. No wonder, therefore, that Schlossberg himself starts his working week on Sunday nights; he has no time for any hobbies other than spending time with his kids.
Retail traders are also benefiting from increased competition among providers, he says. “The individual now trades on wholesale spreads and his cost of doing business is equivalent to that of an institutional trader, but without the baggage of size.” Retail traders’ small size relative to the market allow them to be nimble, and because their orders are much smaller, the market absorbs them with ease.
But it’s not all rosy in the FX markets. Recent efforts by US authorities to reduce the leverage of foreign exchange trading – traders would need to increase the money held in a deposit account to 10 per cent of the value of each trade from the current one per cent – will temper speculative flows and tie up more of traders’ capital, Schlossberg says, adding that the measures as currently proposed would act as a serious tax on the US trader and be an anti-competitive measure.
But UK providers are not subject to such laws – the environment is as good as ever for the British retail currency trader.
CV | BORIS SCHLOSSBERG
Boris Schlossberg, 46 has been a director of currency research at GFT since 2008. He started his trading career at Drexel Burnham Lambert but got side-swept by the high-tech boom and took a 12-year break from Wall Street.
After the dotcom bust of 2001, he returned to trading. He discovered the FX markets in 2003 and “took to it like a fish takes to water”. He worked initially for FXCM as a research analyst and has not traded a stock since.
Schlossberg has an undergraduate degree in economics from Columbia University. “I don’t regret not doing a masters, I have a degree in hard knocks.”
He has two kids aged 16 and 13, who find his television appearances rather amusing – he is a regular on CNBC and Bloomberg.