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5 Things Forex Traders can be Thankful for

Last updated 11/24/2011 11:16 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

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5 Things Forex Traders can be Thankful for

U.S. markets are closed for Thanksgiving with traders off enjoying some much needed rest, relaxation and quality time with their families.  In the spirit of the holiday, we have dug up a few things that forex traders can be thankful for this year.  It has been extremely hard to find any type good news and reason to be optimistic next year and some readers will even argue that the reasons to be thankful are lame but this is the world that we currently live in.  Most experts predict that next year will be a tough one for the global economy with some countries falling back into recession.  But for today only, let us not stress about the future and be thankful that:

1. The World Has Not Come to an End

At many points during the year, when the debt ceiling talks in the U.S. were breaking down, Greece was at the brink of default and rating agencies considered slashing the U.S.’ sovereign debt rating, it appeared that the world was coming to an end.  Thankfully that has not happened and investors managed to take each hit in stride.  The U.S. dollar remained in demand even after America was stripped of its AAA rating by Standard & Poor’s.  The euro started the year off at a rate of 1.3385 against the U.S. dollar and as of Wednesday, one euro is worth 1.3350 U.S. dollars.  Despite all the concerns about European nations being at the brink of default and the euro disappearing in the coming years, it is trading not far from where it was in January. Although we cannot say the same about stocks, the year to date losses is small thanks to a recovery in October.  Global growth is expected to be very slow next year but after many hits, the world is still standing and we expect this to remain the case next year even though, at times, it may feel as if the world is coming to an end.    

2. Policymakers Still Have Firepower

The good news is that policymakers still have firepower and are committed to doing everything in their power to stimulate growth, prevent recession and contagion.  Next month, European leaders are gathering in Brussels and the hope is that they will agree to boost the European Financial Stability Facility, which would provide a larger lifeline for European nations facing liquidity shortages.  The Federal Reserve, Bank of England and the Bank of Japan also have room to increase their asset purchase program and for the BoJ in particular, they have a record amount of yen to spend on intervention in case their currency starts to rise again.  The ECB could cut interest rates and at worst, agree to a greater role in a European bailout but in the interim, the International Monetary Fund has offered their support, which helped to stabilize the euro this week.  The Washington based agency introduced the Precautionary and Liquidity Line which is a 6 month credit line for economically strong countries with short term liquidity needs up to 5 times their contribution to the IMF.  The point is that we should be thankful that policymakers still have the capability to do more if Europe’s economic troubles worsen. 

3. U.S. Data Does Not Show More Weakness

We can also be thankful for the fact that non-farm payrolls never turned negative this year and that there are signs of stabilization in the housing market.   The following chart of NFPs show that job growth has been anemic, but after 2 very weak months for the labor market in May and June, there has been at least some sign of recovery.   

4. Manufacturing and Service Sector Still Expanding

We can also be thankful that the U.S. manufacturing and service sectors are still expanding as are the service sectors in the U.K. and Germany and the manufacturing sector of Canada.  

  5. Q1/Q2 Opportunities Relatively Clear

Finally as traders the increase in volatility over the past year has created quite a bit of opportunity on both an intraday and swing trading basis.  Barring a miracle, the direction of the global economy in the first two quarters of the year is quite clear.  Growth is going to slow with Europe leading the decline.  Austerity measures in Europe put the region at grave risk of falling back into recession and the possibility of more trouble for Italy or Spain means that the door is open for more instability in the market.  The U.S. economy will most likely stagnate and China will slow.  In response, policymakers around the world will probably increase stimulus and this means that most likely safe haven currencies will continue to outperform risk currencies for the first half of the year. 

Although there may be many challenges that lie ahead for the global economy, it is important to take a break and recognize that we do have things to be thankful for. Happy Holidays.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.