Global Macro Uncertainty Drives FX

Terry Flanagan

As the markets become increasingly connected globally, certain asset classes have only just recently caught up to those operating on a macro level.

“Over the past several years, the equities market has become affected by global macroeconomic uncertainty,” said a New York-based foreign exchange participant. “However, given the global nature of foreign exchange, it has always had this characteristic. FX traders need to constantly keep an eye on global news.”

Just a few years ago, investors were able to look at each product in each asset class on its own merits, including its fundamentals and sector, and make reasonably educated trading judgments. But since 2008 and the financial crisis, securities within and throughout all asset classes have become highly correlated with one another.

“Right now you’re seeing several things solidly impacting the FX market, including the European sovereign debt crisis,” said Rob Passarella, vice-president of institutional markets at Dow Jones. “Ten or 15 years ago, you may not have looked at the same data sources. Back then it was more complex with more currencies, but you didn’t need to look at equities or bonds. Now everything is inter-correlated. We will look at the VIX, CDS spreads and sovereign bond spreads. These all impact the markets in the post-financial crisis period and continuing European crisis.”

As the foreign exchange markets become increasingly electronic, some of the same strategies that have now permeated other asset classes are making their way into FX, including algorithmic trading and high-frequency trading.

“In foreign exchange, unlike with equities, you still have a lot of dealer to dealer trading, similar to the bond market, but you’re starting to see automated strategies, based on elementized news feeds based on economic indicators, that may impact a global market like FX coming to the forefront,” said Passarella. “Strategies will look at key information, such as GDP, employment and manufacturing figures. People now trade algorithmically based on that info. We used to see that mainly in the cash equities space and it’s now graduated to FX.”

Foreign exchange trading is said to be the largest and most liquid securities market in the world, and thus investors suffering from so-called equities fatigue are increasingly heading to other asset classes, such as fixed income and FX. That, in turn, further boosts liquidity and the cycle continues.

“People are packing in and trading FX,” said Passarella. “People are going where the volumes are. That’s mainly been happening in the last two years or so; more and more participants coming into the FX market, whether institutional or retail.”

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