This time last
year, many retail traders were wondering whether the volatility caused by
central bank monetary strategies to combat inflation by raising interest rates
would persist. They received their answer within weeks as Russian tanks rumbled
into Ukraine and the world suddenly felt like a more dangerous place.
At such times, the
traditional approach is to pile into the US dollar. But, dollar weakness has
been the key market trend in recent months with an uber-hawkish Fed and rising
inflation now in the rearview mirror. As the rest of the central banking world
play catch-up with the US, rate differentials have narrowed and, thus, added to
the downside pressure on the greenback.
“China’s reopening
has prompted a surge in China-sensitive currencies such as the Australian
dollar,” explained Justin McQueen, a Market Specialist at Capital.com. “Combined
with natural gas prices falling off a cliff, this bodes well for the euro with
the economic outlook looking comparatively more optimistic than just a few
months ago.”
According to
McQueen, these big macro events have contributed to increased interest in FX
trading with traders taking a view on USD’s potential recovery and where the
yen will gravitate next.
“Interest in
USD/JPY picked up in the early weeks of this year,” he continued. “It is still
too early to identify specific levels of increase from last year, but FX
markets have so far been one of the top three most traded markets on our
platform in 2023 with EUR/USD and GBP/USD also among the most popular pairs
traded.”
In 2022, Capital.com
traders chased momentum by nearly tripling the number of trades made compared
to 2021, gradually diminishing their net long holdings in favour of net short
positions and becoming more cautious by increasing the number of trades with
stop-loss orders. This indicates that retail traders were engaging with the
major macroeconomic events that impact a currency and were ready to modify
their positioning during moments of elevated volatility.
In terms of
specific products, CME Group reported a decline of just over 7% in rolling
three month average daily volumes for FX futures and options in January
compared to the previous month.
FX traders are
seeing larger profit/loss swings than they might have known for the last decade
or more. Such volatility is cyclical and likely to come down at some point, but
the question of ‘when’ makes greater education around risk management essential
for retail traders.
That is the view
of Pete Mulmat, the CEO of IG US, who refers to trading growth being driven by the
same three currency pairs as McQueen.
“The action has been in those majors,” he
says. “That said, a resurgence in the Australian dollar has brought pairs
including that currency back onto many traders’ boards.”
In 2023, fears of
a global slowdown look set to dominate as the impact of interest rate hikes
begins to take hold. While many central banks will be looking to end their
hiking cycles this year, the pace at which they do so is likely to differ, and
this will be a key element of trading.
“If some of the
smaller central banks are forced to turn dovish on economic weakness ahead of
the bigger banks, it is likely that there will be more divergence to trade for
both FX day traders and skilled investors alike,” observes
Stavros Lambouris, the CEO at HYCM International.
A good example of
this is the Reserve Bank of Australia (RBA). Recent inflation data came in
above the market’s maximum expectations, which has made the case for a more
aggressive RBA and a terminal rate that could rise higher than 3.5%. On balance,
this should keep the AUD supported against the NZD and traders should watch for
divergence between the RBA and the Reserve Bank of New Zealand for trading
opportunities.
“Central bank
intervention will continue to play a key role in FX trading,” adds Lambouris.
“Traders are accustomed to keeping up with the latest moves, and we often see
the markets anticipating policymakers’ reaction to economic data – whether it
is new inflation print or employment figures – to establish the state of the
economy.”
With US inflation
expected to fall around 3% by the end of the year, concerns are likely to
transform into wider fears about global growth and recession. Previously, many
analysts were predicting a bounce in the dollar as fears of a US recession
(followed by a global recession) dominated.
Now, the
increasing likelihood of a soft landing from the Fed is causing analysts to cut
their forecasts of the USD’s performance this year, and emerging markets are
expected to gain at the expense of the greenback.
“Continuing
geopolitical tension around the globe will have a major impact on trading,”
says Lambouris. “With the conflict between Russia and Ukraine
approaching its one year mark with no end in sight, it may be difficult to
price in risk. However, talks of a ceasefire could lift all financial markets
around the globe in 2023.”
Muamar Behnam,
the Head of Global Retail Sales at Swissquote reckons diversification within
traders’ portfolios is the main trend in the retail trading space in the early
months of 2023.
“We see fewer
traders trading only currency and a move towards diversification just like in
the more traditional non-leveraged side of the business,” he says. “The trend
is clearly towards portfolios with a combination of currencies, bullion (gold
and silver), energy and agricultural commodities.”
Furthermore, Behnam refers
to increased interest in single-stock CFDs.
He agrees that
retail traders are more aware of what is going on in the world and that the
conflict in Ukraine, rising interest rates, and inflation numbers have all had
an impact on trading behaviour which is not going to stop any time soon.
This time last
year, many retail traders were wondering whether the volatility caused by
central bank monetary strategies to combat inflation by raising interest rates
would persist. They received their answer within weeks as Russian tanks rumbled
into Ukraine and the world suddenly felt like a more dangerous place.
At such times, the
traditional approach is to pile into the US dollar. But, dollar weakness has
been the key market trend in recent months with an uber-hawkish Fed and rising
inflation now in the rearview mirror. As the rest of the central banking world
play catch-up with the US, rate differentials have narrowed and, thus, added to
the downside pressure on the greenback.
“China’s reopening
has prompted a surge in China-sensitive currencies such as the Australian
dollar,” explained Justin McQueen, a Market Specialist at Capital.com. “Combined
with natural gas prices falling off a cliff, this bodes well for the euro with
the economic outlook looking comparatively more optimistic than just a few
months ago.”
According to
McQueen, these big macro events have contributed to increased interest in FX
trading with traders taking a view on USD’s potential recovery and where the
yen will gravitate next.
“Interest in
USD/JPY picked up in the early weeks of this year,” he continued. “It is still
too early to identify specific levels of increase from last year, but FX
markets have so far been one of the top three most traded markets on our
platform in 2023 with EUR/USD and GBP/USD also among the most popular pairs
traded.”
In 2022, Capital.com
traders chased momentum by nearly tripling the number of trades made compared
to 2021, gradually diminishing their net long holdings in favour of net short
positions and becoming more cautious by increasing the number of trades with
stop-loss orders. This indicates that retail traders were engaging with the
major macroeconomic events that impact a currency and were ready to modify
their positioning during moments of elevated volatility.
In terms of
specific products, CME Group reported a decline of just over 7% in rolling
three month average daily volumes for FX futures and options in January
compared to the previous month.
FX traders are
seeing larger profit/loss swings than they might have known for the last decade
or more. Such volatility is cyclical and likely to come down at some point, but
the question of ‘when’ makes greater education around risk management essential
for retail traders.
That is the view
of Pete Mulmat, the CEO of IG US, who refers to trading growth being driven by the
same three currency pairs as McQueen.
“The action has been in those majors,” he
says. “That said, a resurgence in the Australian dollar has brought pairs
including that currency back onto many traders’ boards.”
In 2023, fears of
a global slowdown look set to dominate as the impact of interest rate hikes
begins to take hold. While many central banks will be looking to end their
hiking cycles this year, the pace at which they do so is likely to differ, and
this will be a key element of trading.
“If some of the
smaller central banks are forced to turn dovish on economic weakness ahead of
the bigger banks, it is likely that there will be more divergence to trade for
both FX day traders and skilled investors alike,” observes
Stavros Lambouris, the CEO at HYCM International.
A good example of
this is the Reserve Bank of Australia (RBA). Recent inflation data came in
above the market’s maximum expectations, which has made the case for a more
aggressive RBA and a terminal rate that could rise higher than 3.5%. On balance,
this should keep the AUD supported against the NZD and traders should watch for
divergence between the RBA and the Reserve Bank of New Zealand for trading
opportunities.
“Central bank
intervention will continue to play a key role in FX trading,” adds Lambouris.
“Traders are accustomed to keeping up with the latest moves, and we often see
the markets anticipating policymakers’ reaction to economic data – whether it
is new inflation print or employment figures – to establish the state of the
economy.”
With US inflation
expected to fall around 3% by the end of the year, concerns are likely to
transform into wider fears about global growth and recession. Previously, many
analysts were predicting a bounce in the dollar as fears of a US recession
(followed by a global recession) dominated.
Now, the
increasing likelihood of a soft landing from the Fed is causing analysts to cut
their forecasts of the USD’s performance this year, and emerging markets are
expected to gain at the expense of the greenback.
“Continuing
geopolitical tension around the globe will have a major impact on trading,”
says Lambouris. “With the conflict between Russia and Ukraine
approaching its one year mark with no end in sight, it may be difficult to
price in risk. However, talks of a ceasefire could lift all financial markets
around the globe in 2023.”
Muamar Behnam,
the Head of Global Retail Sales at Swissquote reckons diversification within
traders’ portfolios is the main trend in the retail trading space in the early
months of 2023.
“We see fewer
traders trading only currency and a move towards diversification just like in
the more traditional non-leveraged side of the business,” he says. “The trend
is clearly towards portfolios with a combination of currencies, bullion (gold
and silver), energy and agricultural commodities.”
Furthermore, Behnam refers
to increased interest in single-stock CFDs.
He agrees that
retail traders are more aware of what is going on in the world and that the
conflict in Ukraine, rising interest rates, and inflation numbers have all had
an impact on trading behaviour which is not going to stop any time soon.
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Paul Golden