FX Fundamental Analysis
Initial reaction to this comment, admittedly
in pre-holiday/thin
markets from a risk-trading perspective was negative mostly because decisive Fed action is traditionally seen as a better alternative to inaction, whatever that action may be; in this particular case most likely because it could be argued that reluctance to spur growth t he re f o re may or
appreciation
inhibit prevent in
equity market valuations, or spur a ‘risk- off’ attitude to trading, as this type of behaviour has come to be known.
T yp ic a l ly under such circums tances the commodity currencies and those with actual or
perceived
August and October, with such extreme movements
being
classified under the category of ‘risk-off ’.
Other currencies affected besides Australian Dollar and Brazilian Real include CAD, MXN, NOK,
systems and fiscal policies in addition to outperforming on a sovereign and yield basis against the Euro or the Dollar. Of course we all know there are no such things as certainties but one could clearly make a case that some of these peripheral currencies exhibit signs of classic undervaluation, perhaps simply because certain f undament a ls r e m a i n o v e r l o o k e d and/or because the masses are p r e o c cu p ie d with trading the Euro
and fact the
Dollar against each other. In
our
h ig h - b et a correlations to the majors will suffer more than might realistically be expected, should those expectations be based on the premise that FX rates are supposed to reflect fundamental relationships between various economies.
I
n 2011 we saw many sharp depreciations, >14% in AUD from 1.10 to 0.94 and >25% in BRL from 1.53 to 1.95 between
12 FX TRADER MAGAZINE January - March 2012
Euro/Dollar continues to dominate as the most popular currency pair traded globally
NZD and SEK; such price action is highly illustrative of just one type of market paradox faced by FX traders, a factor that was contended with even more this year than usual. We suspect that the inherent irony will not be lost on most of us reading this, seeing as all these countries have remained relatively unscathed with sound banking
r esea r ch concludes that as a percentage of all FX traded, E u r o /Do l lar continues to dominate as the most popular currency pair
traded globally, with volumes up by around 2% to just shy of 30%. Maybe that’s why some of the currencies mentioned don’t get
attention. According trading the
their arguably justifiable to Chad
Smith, Managing Director of Faros Trading LLC in Connecticut, the various anomalies contained within
EUR/USD continue to provide scope for
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