The currency market just got a lot bigger! - Amazon S3 pdfs... · • Anonymous Trading • Absolute returns • Not correlating with other asset classes ... • Charts 15 . EURO

The currency market just got a lot bigger!

Thomas Fischer

• MBA

• 38 years in financial services

• Currency trader 1978-2000

• Jyske Bank/JGAM 2000 -2013

• Editor Currency Cross Trader

• Consultant ENR Asset Management

• Golf

• Copenhagen Marathon 05 4:10

• Copenhagen Marathon 07 4:08

The size of the FX Market 2013

• 5.3 Trillion US dollars every day!

• US dollar 87% of all trades

• UK (41%) & USA (19%) largest jurisdictions

Model Portfolio Theory

• Diversification reduce unsystematic risk

• Best level of diversification – efficient frontier

• Global diversification – currency overlay

• Systematic risk cannot be diversified away.

4

US Efficient Frontier

5

Active Currency Overlay

• Absolute return strategies

• Active Management seeking excess return (Alpha)

• Profitting from inefficiencies

• Allocating percentage to currency managers to get international exposure

6

Global Efficient Frontier Active Currency Overlay

7

Global Diversification

• Individual Stocks, Bonds & Currencies (no currency hedging)

• Global Funds (hedging within Fund)

• Regional Funds (hedging within Fund)

• Emerging Market Funds (hedging within Fund)

• Country Funds (hedging within Fund)

8

Purchasing-Power-Parity

• Long term measurement based on inflation

• Fundamentals always right in the long run but….

• Currency rates affected by short term traders

• Currency risk needs to be watched 24-7

9

Factors affecting currency rates

• Macroeconomic factors – GDP/Unemployment/Growth

• Interest rate differential

• Market trends – momentum/relative strength index

• Central banks

10

FX As An Asset Class –why currencies make sense in an uncertain climate

• 24 hour trading

• Low spreads between buying/selling

• Liquid – daily volume $ 5+ Trillion (NYSE daily turnover $ 55 Billion)

• Many participants – difficult to manipulate markets

• Anonymous Trading

• Absolute returns

• Not correlating with other asset classes

• Even during the 2008 ”Meltdown” trading remain liquid

Returns in a Zero-Sum Market

• As the most liquid market in the world, shouldn’t currency markets be the most efficient, and so not offer consistent returns to investors?

• AND

• How can a zero-sum game (or a long-short market) such as currencies offer consistent returns to investors? Who are the systematic losers?

Liquidity-Seekers (or Non-Profit Seekers)

• International investors who buy bonds, equities, or credit, who either fully hedge their currency exposure, or do not hedge at all

• Central banks who buy or sell currencies in order to maintain an exchange rate policy

• Corporates who need to export, import or engage in FDI

• Tourists

Profit-Seekers

• Currency Managers

• Dedicated currency-only hedge funds

• Global macro hedge funds, who trade currencies as well as other markets

• Retail Traders (Trading platforms)

• Editor Currency Cross Trader

Analyzing Currencies like stocks

• GDP

• Interest rates

• Employment rate

• FDI

• Sentiment

• Charts

15

EURO

• 11 member states introduced EUR January 1999

• Notes and coins were launched on 1 January 2002

• Today 17 member states

• 33% of all currency trades

• 27% of world foreign exchange reserves

Member States using Euro

• Belgium

• Germany

• Estonia

• Ireland

• Greece

• Spain

• France

• Italy

• Cyprus

• Luxembourg

• Malta

• The Netherlands

• Austria

• Portugal

• Slovenia

• Slovakia

• Finland

Euro Statistics

• GDP: 12,4 trillion USD (17 countries)

• Population: 332 million (17 countries)

• Government debt: 85% of GDP

• Unemployment: 12.1%

• 10 year bond: 1.76%

Eurozone alphabet soup!

ECB alphabet soup - explained!

• EFSF = European Financial Stability Facility created 2010 EUR 440 Billion

• EFSM = European Financial Stabilisation Mechanism created 2010 – EUR 60 billion

• SMP = Securities Markets Programme – ECB purchase in secondary bond markets – discontinued 2012 now OMT

• ESM = European Stability Mechanism created 2012 EUR 500 Billion

• LTRO = Long-Term Refinancing Operations existed since 1999 but Mario Draghi introduced 3 year lending in 2011 EUR 489 Billion in 2012 EUR 529 Billion

• OMT = Outright Monetary Transacions 2012 – ECB purchase secondary sovereign bond markets

The EURO Source: BCA

USD

• GDP 15, 6 trillion

• Population 316 million

• 50 states

• 87% of all currency trades

• 63% of World foreign exchange reserves

USD Statistics

• GDP: 15,720,000,000

• Population: 316 million

• National debt of GDP: 100%

• Unemployment: 7.30%

• 10 year Government bond 2.62%

EUR/USD

• All time high: 1.6038 (07/18/08)

• All time low: 0.8230 (10/26/00)

• Average since introduction: 1.2024

• Current: 1.3450

• Daily turnover: 1.3 trillion

Source: Jyske Markets

Currency Cross Trader

• Research and input from trading room

• Friday Updates

• Frequent trade recommendations

• Targets identified

• Leverage suggestions

• Visit The Sovereign Society booth

Thomas Contact Details

• [email protected]

• [email protected]

• 011-45-3880 0011

• 011-45-2526 9239